Red Sea Shipping Turmoil: A ‘Nightmare Situation’
Attacks by Iranian-backed Houthis on commercial ships in the Red Sea have upended shipping in the area, which handles about 12 percent of world trade. Many shipping companies are now avoiding the area — which includes the Suez Canal — and diverting their ships around the tip of Africa, the Cape of Good Hope. That’s a 4,000-mile detour. Others are rerouting across the Pacific.
The turmoil, which includes missile and drone attacks, is creating substantial operational challenges, says Richie Daigle, supply chain evangelist at Tive, a cargo tracking solutions provider. “Immediate consequences include higher freight costs, supply chain disruptions and potential inflationary pressures, particularly for the food and beverage sectors,” he says.
Christian Roeloffs, CEO of Container xChange, a global online platform facilitating container leasing and trading, calls the disruption “a nightmare situation for shippers and exporters.”
Rerouting Challenges
According to the Drewry World Container Index, freight rates for 40-foot containers jumped from US$1,661 on December 21 to $3,777 on January 18. In the week leading up to January 18, they rose 23 percent.
“(F)reight rates, container prices and insurance costs have escalated,” Roeloffs said in a press release. “The impact has been significantly deterrent for container vessels since last month, (as) 70 percent to 80 percent of container traffic has been rerouted, especially the larger carriers.”
In an advisory to clients on Monday, January 22, shipping giant Maersk noted, “The situation in and around the Red Sea/Gulf of Aden remains volatile. Our priority remains the safety of our seafarers, vessels, and your cargo. With this in mind, we are making changes to our ME2 service. … These changes will have the benefit of offering you greater predictability and reliability for your supply chain in this challenging environment.”
Changing shipping routes is no easy feat and results in a domino effect of supply chain disruptions. In addition to operational challenges, increased expenses, prolonged deliveries and changes in transportation networks, shippers face inventory and costs issues due to quickly rising rates, Daigle says. These may also ultimately impact consumers.
“Long-haul rates between Asia and Europe have more than doubled, indicating a cascading impact on global trade,” he says. “As companies adjust and reroute freight, they will be faced with higher costs and slower service. This may lead to shortages of some products. Some shippers may be starting to explore alternative sourcing options, which could come with higher shipping costs, further adding to higher prices for certain goods.”
In a January 17 statement, J.P. Morgan Asset Investment noted, “The economic implications could spill over into commodities and core goods, as well as oil and gas prices. Core goods inflation, which has been disinflating all last year, and are in outright deflation on a three- and six-month annualized basis, could reverse higher, complicating the (U.S. Federal Reserve’s) objective of controlling inflation down to 2 percent.”
Another potential implication: the environment. “In addition to these challenges,” Daigle says, “the longer routes that are now being used require vessels to burn far more fuel, resulting in a big step in the wrong direction for climate initiatives.”
What’s Ahead
Container xChange anticipates a tightening of container availability and vessel space in the pre-Lunar New Year phase. “The rerouting via the Cape of Good Hope adds complexity to the situation,” Roeloffs noted. “We expect freight rates to remain elevated, and supply chain managers will need to navigate ongoing schedule disruptions.”
Looking beyond Lunar New Year, Container xChange projects blanked sailings and capacity reduction by carriers. “The industry is witnessing a focused effort on resetting networks, leading to tightening of container availability and vessel space,” Roeloffs said. “While high freight rates and increased costs pose midterm challenges, our analysis indicates that these disruptions are not likely to be long-term. Rate reductions are anticipated on the horizon due to the structural overcapacity resulting from a severe market imbalance."
Daigle notes, however, that the ongoing attacks and disruptions suggest a high likelihood of continued escalation. “The rerouting of major shipping routes and the geopolitical instability in the region paint a clear picture of an uncertain future for shipping through the Red Sea,” he says. Even if the situation is resolved soon, he expects it to take time for supply chains to return to where they were before this disruption.
“This crisis underscores the vulnerability of key shipping lanes, and supply chains in general, and emphasizes the need for strategies to enhance security and resilience, such as open communication amongst peers and partners along with enhanced tracking and visibility,” Daigle says.
How can companies mitigate issues and shipping disruption? What steps should they take?
Shippers should focus on controlling what can still be controlled, Daigle says: “Increasing awareness of shipment location and conditions is crucial for decision-making during these challenges. Real-time shipment tracking technology is now indispensable for mitigating risks associated with last-minute changes to shipping networks.”
(Photo credit: Getty Images/IgorSPb)