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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.

Port Congestion

The fluctuation of service configurations and increased volumes have resulted in congestion at several ports due to unforeseen circumstances. This places a strain on infrastructure and inland operations. Notably, congestion hotspots are emerging, partly attributable to diversions caused by the Red Sea crisis. This will affect the terminal’s overall performance. The most significantly impacted markets have fewer mainline calls, but each call takes longer, indicating increased freight exchange. Carriers that consolidate shipments onto specific routes will result in larger parcel sizes being managed at primary ports. The dwell time at Jebel Ali has risen due to various factors. Vessel size, seasonal holidays like Eid al-Fitr and Ramadan, or even recent weather events like floods in Dubai are being taken into account. Moreover, increased cargo discharge is stretching inland port infrastructure, including trucking and container storage capacities. Ports in Southeast Asia, such as Singapore and Port Klang, have also witnessed heightened vessel waiting times. Port congestion in the Indian Subcontinent/Middle East and Southeast Asia regions is a major global issue, affecting ports from Ningbo to Dubai. Despite these obstacles, efforts are ongoing to maintain operational efficiency and mitigate disruptions.

Supply Chain Resilience

The current crisis underscores the necessity for global supply chains to prioritize resilience and redundancy. Companies are now reevaluating their reliance on specific routes and suppliers to mitigate the risks associated with disruptions in the Red Sea region. Ligentia, a prominent global supply chain management provider, emphasizes several essential factors that are crucial for their clients in constructing resilient supply chains. These factors include data-driven risk management to identify potential disruptions, diversification, and strategic sourcing. Additionally, Ligentia advocates for technology-enabled transparency. They provide end-to-end visibility and also collaborative partnerships with stakeholders throughout the supply chain. Those less dependent on global sourcing and more inclined towards domestic suppliers appear to be less impacted by the crisis. The Red Sea serves as a pivotal transit point for various industries, and any disruptions in shipment flow can have extensive implications for global markets. This surge in costs particularly affects retailers heavily reliant on global sourcing. Manufacturers and chemical companies in Western Europe and North America also face hurdles in acquiring essential parts and goods amidst the ongoing crisis.

Conclusion

The Red Sea crisis has severely impacted global trade and shipping operations. The conflict involving Houthi rebels has led to security risks that compel many vessels to avoid the Red Sea, opting instead for longer routes around Africa. The effects of this crisis being ignored could lead to a series of negative consequences. This includes but is not limited to, disruptions in trade routes, increased transportation costs, shortages of goods, economic downturns, political instability, and environmental damage. Port congestion has become a prevalent issue, straining infrastructure and inland operations across various regions. These implications extend beyond the shipping and transportation sectors, affecting industries worldwide. They also potentially exacerbate current geopolitical tensions. This requires proactive measures and international cooperation to reduce its impact on trade, stability, and the environment. Amid these challenges, companies are emphasizing resilient and redundant supply chains, focusing on data-driven risk management, route diversification, and strategic sourcing. Failure to do so could result in severe and long-term ramifications for economies, industries, and communities globally.


References

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Chen Chuan Teoh
Chen Chuan Teoh
Teoh Chen Chuan has substantive years of experience in the Agrochemical Industry and his current job is a Supply Chain Executive responsible for production planning, logistics planning, and invoicing. He is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Chen Chuan completed the Diploma in Logistics and Supply Management (DLSM) on June 2024 at SIPMM Institute.
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