The recent attacks on ships in the Red Sea by Houthi rebels in Yemen have sent shockwaves through the global trade industry, further exacerbating the existing challenges posed by port congestion and the Russian invasion of Ukraine. With cargo ships being targeted, the Suez Canal has been forced to shut down, causing disruptions in traffic and rerouting ships around the tip of Africa. These disturbances are resulting in delays and increased costs at a time when the world is still grappling with economic inflation.
Ryan Petersen, the CEO of supply chain management company Flexport, describes the current situation as 'short-term chaos' that leads to heightened expenses. He highlights that each rerouted ship carries approximately 10,000 containers, necessitating extensive communication and planning to adjust the journeys of these containers.
Compounding the chaos in global shipping is a 'double whammy' as water levels in the Panama Canal have been significantly reduced due to drought. Additionally, shippers are rushing to move goods before Chinese factories shut down for the Lunar New Year holiday from Feb. 10-17. As a result, industries across various sectors are feeling the brunt of these disruptions in supply chains.
Man & Machine, a company based in Maryland that manufactures hospital supplies, finds itself in an unfortunate predicament. Clifton Broumand, the company's founder and CEO, is awaiting a delayed shipment from Taiwan and China. The usual route through the Suez Canal has been compromised due to the attacks, while rerouting through the Panama Canal has proven futile due to the drought-related issues. As a result, alternative routes such as crossing the Pacific and using truck or train transportation may be necessary. Broumand acknowledges the inconvenience and frustration caused by these delays but maintains that it is manageable and will not cause drastic harm.
Several other industries are also experiencing similar challenges. Electric carmaker Tesla had to halt production at its factory near Berlin due to shipment delays, while Volvo temporarily ceased operations at its plant in Belgium while awaiting a crucial part. A Suzuki Motor Corp. plant in Hungary experienced a week-long shutdown due to difficulties in obtaining necessary parts from Japan. The disruptions are rippling across different sectors, affecting not only the automotive industry but also the retail sector. The British retailer Marks & Spencer, for instance, warned customers of delays in their upcoming spring clothing and home goods collections.
The impact of the Red Sea disruptions extends beyond individual businesses. The maritime shipping industry as a whole is facing substantial consequences. According to Steve Lamar, CEO of the American Apparel & Footwear Association, roughly 20% of clothes and shoes imported into the U.S. pass through the Suez Canal. The figures are even higher for Europe, with 40% of clothes and 50% of shoes transiting through the Red Sea. The diversion of almost 25% of global shipping capacity from the area is resulting in longer trips and significant cost increases. The cost of shipping a standard 40-foot container from Asia to northern Europe has skyrocketed from less than $1,500 in mid-December to nearly $5,500. Similarly, shipping Asian cargoes to the Mediterranean now costs almost $6,800, compared to $2,400 in mid-December.
While the current disruptions are causing headaches for businesses, experts emphasize that the situation is not as severe as previous supply chain disruptions during the pandemic. Shipping companies have expanded their fleets to accommodate shocks like these, and global demand has cooled off. The U.S. Federal Reserve and other central banks have implemented measures to combat inflation, while China's economic growth has slowed down. Despite these factors, the longer the conflicts in the Middle East persist and disrupt Red Sea trade, the greater the impact on global food security and potential increases in oil prices.
For now, companies are navigating through these challenges, finding alternative solutions where possible. Some have resorted to shipping goods by air, though this is more cost-prohibitive for bulkier items. While delays are burdensome, particularly for time-sensitive industries like fashion, companies are adapting and managing the situation as best they can.
The ultimate outcome remains uncertain. If shippers continue to avoid the Suez Canal for an extended period, the effects could be far-reaching. Flexport's CEO Petersen warns that higher costs could lead to goods inflation of 1 to 2%. Shipping expert Jan Hoffmann cautions that the Red Sea disruptions could also impact global food security by slowing down the distribution of grain to parts of Africa and Asia.
In the face of these challenges, businesses are making the best of a difficult situation, employing adaptive strategies and maintaining a measured outlook. While the disrupted global trade landscape may present short-term chaos, companies are working diligently to find solutions and minimize the impact on their operations and customers alike.
