How Much Does The Red Sea Crisis Affect China'S Cotton Textile Industry?

For the routes between Asia and Europe, the Red Sea is the only way to go. The daily trade routes between the Red Sea and Suez Canal account for 12% of the total global trade, including 30% container transport and 10% oil shipping; If you don't cross the Red Sea, you have to bypass the Cape of Good Hope at the southernmost tip of Africa to travel 3280 nautical miles to Europe. From November 2023, the Yemeni Hussai armed forces launched actions against Israel in the Red Sea, which led to the announcement on December 15 of the suspension of all container ship transportation through the Mander Strait and the Red Sea by several international shipping companies, including German shipping company Herbert, Denmark Maersk Shipping Group, Mediterranean Shipping Company and France Dafei Shipping Group. Although the US Navy has set up an escort alliance in the Red Sea, the effect is very poor. At present, the freight and insurance fees of the Red Sea channel have increased by 20-30%, and the additional costs and unpredictable risks have led to a 40% decrease in the channel transit volume. However, if shipping companies choose to avoid the Red Sea, each merchant ship will make a round trip from Asia to Europe, which will increase the fuel cost by 4 million dollars.

It is widely believed in the industry that the impact of the Red Sea crisis on China's cotton and cotton textile industry is "short, long and empty", which is limited and optimistic. The reasons are as follows:

First, the Red Sea crisis has not only affected the export of textiles/clothing from Southeast and South Asian countries to Europe, but also reduced the volume of Brazilian, American and African cotton purchased by some countries in Hong Kong. The direct result is that clothing enterprises/retailers in Europe, the United States and other countries directly place orders to Chinese processing enterprises. Some export orders from Bangladesh, Indonesia and other countries have to return to China due to raw material problems and transportation problems. For export enterprises in Southeast Asia/South Asia, if they bypass the Cape of Good Hope, not only will the freight rate rise significantly and the profit drop significantly, but also there will be great uncertainty in the delivery time.

Second, although the Red Sea crisis also has a certain impact on China's textile and clothing exports to Europe (the routes in Europe and the Middle East have been empty), on the one hand, China Europe trains are more alternative to shipping. The space of China Europe trains has been booked up in advance, and the freight rate in January has risen 10-20% month on month; On the other hand, the proportion of European market in China's textile and clothing exports has continued to decline (14.4% in 2022, and 30.9% and 20.7% respectively for China's cotton knitted and woven clothing to the EU from January to October 2023). On the whole, China will export more than 880000 tons of reserve cotton (import cotton accounts for a large proportion) in 2023, and the port cotton inventory is sufficient (the transportation of American cotton and Brazilian cotton is not significantly affected by the Red Sea crisis), so the supply of domestic cotton and imported cotton is sufficient, and the bottom line for receiving export orders (including traceability orders) is sufficient.

Third, in the medium and long term, the Red Sea crisis is not conducive to China's cotton consumption, cotton textiles and clothing exports. First, the Red Sea crisis has led to a shortage of containers and port congestion. The shortage of empty containers may spread to Asian ports as soon as mid to late January. Empty containers needed in China's peak export season may be trapped in other places (such as insufficient supply of textile and clothing export and cotton import containers), and ships in Asia will also face the challenge of empty container availability; Secondly, affected by the tension in the Red Sea region, the freight rates of North American routes, Persian Gulf routes and other markets will continue to rise in an all-round way, and the cost of China's textile and clothing exports and cotton imports will rise; Thirdly, the China Europe Express only temporarily acts as a substitute for the Red Sea route, and its carrying capacity still cannot be compared with that of sea transportation. At present, the shipping section in January and February has been fully booked by European customers in advance, but at the same time, it has restricted the export demand of textiles and clothing to other countries and regions, making it more difficult to perform the contract.