Will the situation in the Red Sea create red ink for your company?

Jan 10, 2024

Folks, we are living in a different world! The conflict in the Middle East and the Red Sea is creating turmoil in the ocean transportation market and highlighting just how fragile global supply chains can be.

Let’s cut right to the chase. As chronicled in an excellent article “The Houthi Butterfly Flaps Its Wings,” you basically have a bunch of Islamic militant goat herders from Yemen wreaking havoc on global supply chains. I recommend that your read the article as it does an outstanding job at summarizing the fallout from the Houthis continued attacks on ocean vessels.
As it turns out, by launching relatively low cost drone attacks against ocean vessels as they transit through the Bab Al-Mandeb Straits, you can make it so risky to transit the Suez Canal that many ocean carriers will suspend operations in the Red Sea. And since the Suez Canal handles approximately 30% of all worldwide container traffic and over $1 trillion worth of goods pass through it annually, that’s a BIG DEAL!
Shippers got bad news when Maersk, MSC, Cosco and other ocean carriers chose to suspend operations in the Red Sea and will not resume operations there until they deem it safe to go through the Suez Canal. As noted in an excellent white paper from Kuehne & Nagel, by avoiding the Suez Canal by sailing their vessels around the Cape of Good Hope, the carriers are adding anywhere from 2,000 to 3,000 nautical miles to their journeys to destinations such as Europe, South America, and the East Coast.
What does this mean for shippers?
First, it will take longer to get your goods being shipped via ocean containers. Instead of taking ten to twelve hours to go between the Red Sea and the Mediterranean, you have now added as much as two weeks to the journey. As we saw in 2021, this could impact your balance sheet and your cash conversion cycle since it takes longer to get your goods/inventories.
Second, it’s going to cost you more to move containers. The ocean carriers that choose to continue moving through the Red Sea are facing much higher insurance costs while those who choose the longer route face much higher costs from fuel and labor. More importantly, according to Kuenne & Nagel the significant increase in transit times has eliminated 20% of the capacity in the ocean markets as it takes longer to turn vessels and containers. This is referred to as slowing down the supply chain circulatory system. And when you slow down the system and have higher operating costs, shippers will see higher rates and surcharges. And that is exactly what is happening now. Additionally, the widespread impact of this issue is causing rates to increase on routes from Asia to the West Coast as well.

Overall, the pricing situation is fluid with container rates in some lanes doubling and other lanes having high double digit percentage increases. For example, a shipper called and confirmed that they were paying $2500 to $3500 per container but are now seeing rates in the range of $5-6000. If other factors cause further disruption, these rates could still rise.

Another thing that needs to be on your radar screen is the continued drought at the Panama Canal. After receiving a confidential briefing last week, it appears that the only thing that is keeping container rates from going back above $20,000 per container, is that demand in China continues to be very weak due to their current economic conditions. But if the surge of exports that typically takes place before the Lunar New Year when factories take a break occurs, container rates could temporarily go much higher.

What do shippers need to do?
The easy part is to stay informed and to evaluate your options. The second and more challenging part is to stress test your supply chains and do a supply chain assessment to provide alternatives when, not if, these disruptions occur.

Having recommended that, we know that many shippers may not have the time, knowledge or experience to conduct a supply chain assessment or stress test their supply chains. So they may choose to in essence play “Russian Roulette” with their supply chains and accept the significant risks and rising costs associated with that strategy.

Fortunately, that doesn’t have to be your reality. If you’re short on time or looking for outside expertise, we have two options for you. First, take advantage of our outstanding resources such as the ones from MIT Professor David Simchi-Levi, and other experts on this topic.

Or, it you want to make it super easy for you and your teams, here's the second option: Give us a call at 630-530-6190, send us an email or schedule a time to meet. We’d welcome the opportunity to share information with you and discuss how you can protect your company’s supply chain and avoid a sea of red ink.