SMM Analysis On How Heightened Red Sea Tension Amid Palestinian-Israeli Conflict Will Affect China's Copper Cathode Imports

In recent days, there has been a surge in attacks on vessels in the Red Sea, prompting several international shipping companies to announce the suspension of operations in the area. The Suez Canal-Red Sea route, a key link between Asia, Africa, and Europe, connects the Red Sea to the Mediterranean and is a global maritime hub.

The Mandeb Strait, a strategic link between the Red Sea and the Gulf of Aden, crucial for Indian-Atlantic oceanic travel, is significant. With the affected firms holding over 50% of global container market share, shipping suspensions may hike trade transport costs and impact global shipping and supply chains significantly.

China's copper cathode imports from Europe, including countries like Poland, Serbia, Bolivia, and Russia, often start at the Netherlands' Rotterdam port, Europe's largest. They travel through the Mediterranean, Suez Canal, Red Sea, into the Indian Ocean, then through Malacca Strait, South China Sea, and on to Hong Kong, Shanghai, and parts of Japan and Korea.

In 2023, China's monthly copper imports from Europe, excluding Russia, average 9,000 mt. With some Russian copper arriving overland, total sea-borne imports from Europe are about 20,000 mt/month, 7% of China's monthly copper cathode imports. The short-term market impact is limited. LME stocks are at 168,000 mt with the share of canceled warrants climbing to 21%. Global shipping disruptions suggest a potential inventory drop.

Vessels avoiding conflict reroute via Cape of Good Hope, facing ~30% higher transport costs and 10-14 extra days at sea (varying with ship speed), increasing fuel costs by hundreds of thousands of dollars. Medium to long-term, supply chain inefficiencies and rising costs could dampen demand and worsen eurozone inflation, possibly prompting monetary policy changes that may impact commodity prices.