Treading the Red Sea on a Wave of Hostility and Threat

Every day brings with it another news of how the Israel-Hamas war has impacted life as we knew it in the region. In the latest development, a series of attacks in the Red Sea have, just as expected, caused major disruptions to a critical trade route and sent shipping soaring. It is getting increasingly difficult for exporters from the region to send out toys, apparel, tea, and auto parts to retailers as disarray ripples through freight supply chains around the world.

It is being reported that shipping costs have more than tripled in some cases as exporters and shippers unwillingly take alternative ocean routes to send out cargo, being left with no other choice. If there are extended disruptions, the consumer goods sector that supplies the world’s top retailers like Walmart and IKEA will face the biggest impact, S&P Global said in a report.

Iran-backed Houthi militants in Yemen have stepped up attacks on vessels in the Red Sea since Nov. 19 to show support for Hamas during Israel’s military offensive in Gaza. The attacks have disrupted a key trade route linking Europe and North America with Asia via the Suez Canal.

Alan Baer, CEO of OL USA, has teams advising shipping and logistics clients to prepare for at least 90 days of Red Sea disruptions. “It doesn’t help that it’s Christmas weekend,” said Baer. “We’ll have a quiet period from now until Jan. 2, and then everybody will be frenetic.”

Being proactive, there are a few companies already eyeing to move to so-called intermodal transport, which can involve two or more modes of transportation. In fact, according to insights from Jan Kleine-Lasthues, COO (Airfreight) at Hellmann Worldwide Logistics, the leading German freight forwarder is already registering increased demand for combined transportation of goods like apparel, electronics and tech items.

Why combined transportation? Well for one, this alternative route allows customers to avoid the danger zone in the Red Sea and secondly, helps avoid the long voyage around the southern tip of Africa. Notably, if the time it takes for goods, especially novelty and tech cargo, to get to shelves doubles, more shippers will switch to air.

While companies moving urgent or critical items might opt to use air freight, the expense means it is not a blanket solution, said Paul Brashier, Vice President of Drayage and Intermodal for supply chain group ITS Logistics. Moving goods by air costs roughly 5-15 time more than by sea, where container shipping rates are still low by historical standards, said Brian Bourke, Global CCO at SEKO Logistics.

Some 35,000 vessels sail through the Red Sea region annually, moving goods between Europe, the Middle East and Asia, representing about 10% of global GDP, said Corey Ranslem, CEO of British maritime risk advisory and security company Dryad Global.

“Under an extended threat you will see the price of fuel and goods into Europe increase substantially because of the increased costs of diverting around Africa which can add roughly 30 days to a transit depending on the arrival port,” Ranslem said.

Shipping companies operating in the region are increasingly taking the longer route to avoid any threats to cargo, as well as, trail as close as possible to the stipulated schedule time. To take an example, Tailwind Shipping Lines, a subsidiary of German discount supermarket chain Lidl, which transports non-food goods for Lidl as well as goods for third-party customers, said it was shipping goods around the Cape for now.

Shipping companies are currently grappling with uncertainties surrounding a newly formed international navy coalition orchestrated by the United States, aimed at stabilizing a crucial maritime region. The lack of clarity poses challenges for these companies, especially concerning the resumption of European access to the Suez Canal—a vital route for the transportation of clothing supplies from Asia, according to an industry insider.

Compounding the issues, the Panama Canal is contending with a severe drought, leading to a reduction in the number of permitted ship passages. The looming Chinese New Year, scheduled for Feb. 10-17, adds urgency to the situation as there is a rush to transport goods before factories in Asia close for the holiday. These closures can significantly disrupt the supply chain for a month or even longer.

Furthermore, owners of large container ships have initiated the imposition of various fees, including emergency surcharges, in response to disruptions in the Red Sea. Notably, the French shipping group CMA CGM issued a customer notice on Wednesday, outlining fees of $1,575 per 20-foot container, $2,700 per 40-foot container, and $3,000 for refrigerated containers and special equipment related to cargo traveling to and from Red Sea ports. These developments underscore the intricate challenges currently facing the global shipping and logistics industry.

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