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Red Sea Supply Chain Disruption Update

Jan. 22, 2024
Attacks on commercial ships in the Red Sea are forcing some cargo ships to take the long route around the southern tip of Africa, creating disruptions and driving up transportation costs.

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Attacks on commercial ships in the Red Sea are making it more difficult—and often dangerous—to transport goods to and from Asia and Europe. In fact, the cost of sending an ocean container from China to Europe has increased by 114% in the last month due to the extra 10 days and additional $1 million in fuel required to make the extended voyage, Reuters reports.

"The cost of goods into Europe from Asia will be significantly higher," DP World’s Yuvraj Narayan told Reuters. "European consumers will feel the pain...It will hit developed economies more than it will hit developing economies."

Some companies are taking precautionary measures. For example, Michelin planned to halt output at four of its factories in Spain due to delays in raw materials deliveries, the publication reports, and shipping operator Nippon Yusen instructed its vessels navigating near the Red Sea to wait in “safe waters” while it considers potential route changes.

No Quick Resolution in Sight

In January, a U.S.-led effort to stop the Houthis attacks on shipping vessels—which are said to be happening in response to the war in Gaza—began launching air strikes against targets across Yemen. Since then, there’s been a rash of attacks on ships in the Red Sea, CBC reports. “Global shipping companies have since been avoiding the region, opting instead for longer, more expensive routes to deliver their cargo.”

Ocean shipping company Maersk is bearish on the prospects of a quick resolution to the Red Sea situation. According to MarketScreener, Maersk CEO Vincent Clerc expects the related global shipping disruption to last at least a few months.

Maersk is one of many large shipping lines that have instructed hundreds of commercial vessels to stay clear of the Red Sea, forcing vessels to take the longer route around Africa in response to attacks on shipping by Iranian-backed Houthi militants.

“Freight rates have more than doubled since early December,” MarketScreener reports, citing Drewry World Container Index data, “while insurance sources say war risk insurance premiums for shipments through the Red Sea are also rising.”

Supply Chain Impacts

The verdict is still out on the impact that the Red Sea attacks and subsequent rerouting of ships will have on global supply chains. Flexport’s Ryan Petersen told Bloomberg the rising shipping costs and delivery delays are hitting many companies. “I think you’re going to see that across a huge swath of companies, especially in Europe but also on the East Coast of the US,” he said.

On the other hand, UBS Chief Economist Paul Donovan posits that the economic threats remain muted, citing ships still sailing through the Suez Canal and European gas prices that are the cheapest since August, Bloomberg reports. “The additional nine days it takes to ship cargo around the Cape of Good Hope is unlikely to result in shortages, and shipping costs are a tiny part of the price consumers pay for goods,” Donovan said.

Okay for Now

For now at least, large package carrier FedEx isn’t expecting too much of an impact on its operations as a result of the Red Sea crisis. Reuters reports that the company hasn’t seen any major shift to air freight, despite Red Sea disruptions caused by Houthi attacks on ships that have extended cargo transit times by more than two weeks,” CEO Raj Subramaniam said.

“Shipping over the ocean makes up 90% of global commerce so even a small change would have an impact, but we haven’t seen much yet,” Subramaniam said. Adding that air freight rates have remained “stable.”  

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