Conflict in the Red Sea is almost a daily occurrence as Yemen-based Houthis trade fire with an international coalition of trading nations guarding the sea. The rerouting of ocean cargo to avoid the Red Sea has increased freight rates, caused shipping delays and is making insurers nervous. But some industries are better positioned than others to manage through the crisis.
Source: Mappr
Manufacturing may be more resilient to the Red Sea emergency than other sectors, according to Balika Sonthalia, senior partner and Americas co-lead in the Operations and Performance practice of global management consultancy Kearney
“I see some manufacturing companies thinking through their raw material sourcing,” she said in a statement. “There’s a resilience play here: most of these companies, because the volumes they ship are significant, tend to go with contracted routes. It’s spot rates that are going higher. So, there’s probably a one-time or a short-term cost implication.”
“If you are a manufacturer and your sourcing is impacted, and you’re relying a lot on Asia outbound to the U.S., production planning schedules and forecasting for raw materials are likely the biggest challenge,” she added.
The chemicals industry could feel more impact. Many global chemical companies don’t have manufacturing for every single kind of product in every geography, Sonthalia explained. “Certain geographies supply customers and other geographies do the first order of manufacturing. The finishing and the packaging often happens more locally to the customer base. Chemicals, paints, lubricants—sectors where there’s more manufacturing happening—could see more impact from the Red Sea crisis.”
Recent rate hikes
Major carriers are avoiding the Red Sea entirely and are rerouting ships around Africa. This is leading to higher costs for carriers using more fuel and more ships for longer journeys, and higher container rates for shippers, according to cargo marketplace Freightos.
During the week of January 8, authorities from a group of 12 nations, including the U.S. and UK, issued a “final warning” for the Houthis to cease their Red Sea attacks. China also called for the attacks to end. But the Houthis remain undeterred and have launched multiple attacks, including drones launched in the region, boats loaded with explosives, and a hijacking attempt via small-vessels.
Six of the top 10 container carriers are diverting away from the Red Sea: Maersk, MSC, Hapag-Lloyd, ZIM, ONE and CMA CGM (though CMA CGM is still sailing some vessels through). Most Asian carriers – Evergreen, HMM, Yang Ming, OOCL and COSCO — are not diverting, so container vessels are still using the Suez, but the total fleets of the carriers that are diverting represent 62 percent of global capacity, according to Freightos.
COSCO has reportedly joined OOCL in ceasing Israeli port calls, possibly as a strategy to avoid becoming Houthi targets.
For the week of January 8:
- Freightos Baltic Index daily rates for the ex-Asia lanes that typically use the Suez Canal and which include Red Sea-related surcharges, were $4,234/FEU to N. America East Coast, a 69 percent increase since diversions started in mid-December.
- Asia – N. Europe rates of $4,789/FEU are 226 percent higher, and prices to the Mediterranean of $5,202/FEU are 116 percent higher. Prices are likely to continue climbing in the near term as mid-month GRIs and additional surcharges come into effect. Backhaul rates on these lanes have at least doubled as carriers seek to offset higher costs.
- Asia – N. America West Coast rates have increased 74 percent to $2,713/FEU since mid-December as well, with reports that prices will climb to $5,000/FEU next week as shippers may be shifting volumes to the West Coast to avoid East Coast delays.
The Chinese Lunar New Year is adding pressure on carriers, Freightos added. Demand is likely increasing as shippers try both to ship further in advance to accommodate longer transit times and to get orders out of China before manufacturing slows down over the holiday that starts February 10th. The next couple weeks will likely be the worst in terms of capacity shortages and possible congestion.
Other cost burdens
The two visible and obvious cost components that are leading to higher transport costs resulting from rerouting to the Cape of Good hope are insurance and fuel costs, reported Container xChange, an online container logistics platform.
Insurance for cargo transiting the Red Sea has become challenging and insurance costs have surged in anticipation of the difficulties and challenges that do not seem to taper off.
Another element is the fuel cost which has increased roughly by 20 to 23 percent by way of traveling through the Cape of Good Hope, as compared with the traditional Suez Canal route.
“Ultimately, the final consumer pays the freight cost. In the short term, usually there is some intermediary that pays the bills, because they have promised at some certain price, but ultimately in normal circumstances, the price per unit is adjusted marginally to the end consumer when such a disruption occurs,” said Christian Roeloffs, cofounder and CEO, Container xChange.
Rewiring supply chains
This latest geopolitical disruption of the supply chain only reinforces the benefits of re- and near-shoring.
“The Red Sea is a wakeup call for companies to rewire and localize their supply chains,” Sonthalia said. “The Red Sea being closed to trade for some of the world’s major providers means that companies need to continue moving in the direction of supply chain rewiring and localization. Any disruption that has implications on product availability and inbound shipping points to the need for companies to rewire their supply chains.”
Revising the supply chain is never a short-term strategy—it is a fundamental change because of the time it requires and capital investment, Sonthalia concluded. “Since 2021, when the pandemic was at its peak, every company has started to explore this, and the Red Sea disruption has been a reinforcement for companies already moving in this direction.”
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