The Effects of Global Supply Chain from the Red Sea Crisis

This article discusses the multifaceted impact of the Red Sea crisis on global shipping and trade. The “Red Sea crisis” refers to disruptions occurring in the region, particularly affecting maritime trade routes and shipping operations. These disruptions include attacks on shipping vessels, such as missile strikes and hijackings, primarily attributed to the conflict involving Houthi rebels in Yemen. Many maritime companies have avoided the Red Sea route due to security risks, leading to shifts in vessel routes and increased sailing times. The crisis has also contributed to a surge in shipping costs and port congestion issues, impacting global trade and supply chains. Measures to address these challenges include enhancing supply chain resilience through strategies like data-driven risk management and diversification of trade routes.

Vessel Rerouting and Increased Vessel Sailing Time

The Red Sea facilitates about $1 trillion of trade annually, or approximately 12% of all trade worldwide. Large cargo ships, especially those that are longer than 300 meters, opted to sail around Africa instead of trying to transit via the Red Sea and Suez Canal. This leads to changes in vessel departures, course adjustments during voyages, and ad hoc changes in port call sequences. The US and UK have launched military actions to defend ships in reaction to the Houthis’ attacks on the Red Sea shipping. A total of 354 (Linerlytica, 2024) and 364 (Clarksons Research, 2024) container vessels were redirected from the Suez Canal to the Cape route due to the Red Sea crisis between December 15, 2024, and January 7, 2024. The impact of the Houthi attacks has accounted for roughly 16.4% of the global container fleet capacity being disrupted. These statistics suggest a notable shift, with approximately 80% of ships utilizing the Suez Canal now selecting the longer Cape route.

The crisis has affected 30% of global container trade and caused a 42% decline in trade volume in the past two months, according to UNCTAD. Large vessels being rerouted have posed significant logistical challenges and time constraints. Fleet capacity was also increased to accommodate the same quantity of goods to be transported within the same time frame and port call frequency. Weekly departure schedules for typical liner routes such as North Europe and Asia also required at least two additional vessels. This change was to combat the additional sailing time associated with the Cape route deviation. There would be short-term capacity limitations and slot space scarcity for seasonal surges like the lead-up to Chinese New Year. Furthermore, due to the longer sailing distance, total bunker consumption, such as fuel and necessities for the marine crew, was also increased during the rerouting. Efforts to reduce emissions under IMO regulations by the shipping industry are rendered ineffective. Carrier announcements indicate rerouting through February 2024, but Suez route may be reconsidered if security improves in affected areas. Persistent effects of the Red Sea crisis may force ships to reroute around the Cape, impacting the importance of the Mediterranean Basin for marine trade.

Increased Shipping Costs

The Red Sea crisis has triggered a significant surge in shipping costs, with spot freight rates experiencing notable increases across key trade routes. Several factors primarily cause heightened freight rates. Longer route distances will result in reduced available slots and increased fuel costs. Negative expectations from shippers about available capacity also have shippers increasing rates to cover potential losses. Shipping costs, particularly along routes that generally transit through the Suez Canal, have surged nearly five-fold, with prices from Asia to Europe experiencing significant increases. Ocean spot fees, which are one-time fees paid by shippers for current market pricing, have spiked rapidly in response to the Red Sea shipping crisis. Retailers heavily dependent on sea freight may encounter difficulties, although numerous have mitigated their freight risks by securing fixed rates. Certain freight partners have renegotiated rates downward, raising the possibility of upward adjustments in the current circumstances. According to the Freightos index, a significant surge of approximately 120% in global freight rates since late October, impacted routes worldwide. Shipping costs also remain high, affected by the duration of delays. Nevertheless, there is hope that shipping rates might decline rapidly once the disruptions are resolved, considering the surplus of container ships worldwide.