Latest update on the “Red Sea” situation & its impact on sea freight & supply chain

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Latest update on the “Red Sea” situation & its impact on sea freight & supply chain

As the Red Sea crisis continues to unfold, its far-reaching impact on global supply chains has become more pronounced, surpassing even the initial disruptions caused by the COVID-19 pandemic. The Red Sea attacks are causing significant disruptions in service networks.

There are ambiguities surrounding services connecting Asia to Europe and the Mediterranean. The extended transit route around the Cape of Good Hope is significantly affecting the availability and timeliness of vessels for equipment positioning, in addition to additional transit times.

Changes in Surcharges and Regulatory Permissions

In the United States, carriers are typically required to announce surcharge changes with a 30-day notice period. However, due to the escalating Red Sea crisis, multiple shipping lines have received special permission from the Federal Maritime Commission (FMC) to make announcements with much shorter notice periods. Furthermore, Freight Forwarding Companies (FFWs) have been authorized to pass on cost increments, citing the Red Sea crisis.

Surge in Freight Rates

  • Freight rates have experienced a notable surge. The Drewry composite index has risen by 23% to reach $3,777 per 40ft container this week, marking an 82% increase compared to the previous year.
  • The Harpex index has seen a 12% rise since mid-December, impacting the availability of ships for charter.

Disruptions in Access to Empty Equipment

Service disruptions are not limited to freight rates. Carriers are also grappling with challenges in accessing empty equipment. To address this, carriers have introduced Empty Equipment Imbalance charges on backhaul lanes.

Red Sea Disruptions: Key Points and Latest Updates

Impact on Vessel Capacity

  • Sea-Intelligence reports that longer transit routes around the Cape of Good Hope are reducing vessel capacity for container pickup at ports.
  • The vessel capacity drop is the second largest in recent years, following the Ever Given incident in the Suez Canal in March 2021.

Shipping Rates Fluctuate Across Routes

  • The rates for shipping from Asia to North Europe and the Mediterranean experienced a weekly increase of 12% and 21%, respectively. It’s worth noting that these increases, while notable, are relatively modest when compared to the sharp spike observed two weeks ago.
  • Conversely, the back haul from Europe to Asia witnessed a significant weekly surge of 50%.
  • Furthermore, the spot rates for shipping from Asia to the U.S. West Coast (USWC) and the U.S. East Coast (USEC) registered increase of 38% and 35%, respectively. This comes after a week where these rates remained virtually unchanged.

Impact on Companies and Industries

  • Major companies such as Tesla, Volvo, Michelin, IKEA, Next, Crocs, and others are experiencing delays and disruptions in their supply chains due to the Red Sea shipping crisis.
  • Delays in container arrivals are affecting manufacturing as well as product availability.

Economic and Global Implications

  • Chinese exporters are facing increased shipping costs, impacting their profitability.
  • The disruptions highlight China’s vulnerability to supply chain disruptions and external shocks.
  • Some companies are considering diversifying their production sources and “near-shoring” strategies.

The Red Sea shipping disruptions continue to have far-reaching consequences for global supply chains, affecting vessel capacity, increasing shipping costs, and causing disruptions across various industries. Companies are grappling with the need to adapt to these challenges, and the situation remains dynamic as stakeholders seek solutions to mitigate the impact.

Impact of the Houthi raids on major companies

Auto

  • Michelin: Four factories in Spain owned by the French tyre maker halted output on January 20 and 21 due to raw materials delivery delays.
  • Suzuki: The company’s Hungary production plant restarted manufacturing on January 22 after a halt in the previous week due to delays in the arrival of Japanese-made engines. It said shipping routes were changed to pass around Africa, which could affect pricing.
  • Tesla: The US-based electric vehicle maker will suspend most car production at its factory near Berlin from January 29 to February 11 due to components shortage caused by shifts in transport routes.
  • Volvo: The Swedish automaker said on January 12 that it would halt production at its Belgian plant for three days due to delays.

Energy

  • Edison: The energy group’s CEO said on January 25 that it was starting to experience a slowdown in liquefied natural gas (LNG) supplies from Qatar.
  • Qatar Energy: The world’s second-largest exporter of LNG has stopped sending tankers via the Red Sea although the production continues, a senior source with direct knowledge of the matter told the Reuters news agency on January 15.
  • Shell: The British oil major suspended all shipments through the Red Sea indefinitely, the Wall Street Journal reported on January 16.
  • Valero Energy: The US refiner said on January 25 that the Red Sea attacks have led to a rise in freight rates for crude oil.

Retailers

    • Adidas: CEO Bjorn Gulden said on February 1 that shipping disruptions in the Red Sea were negative for gross margins, adding that “exploding” freight rates were driving up costs and shipping delays were causing some delivery issues.
    • Ikea: The furniture retailer is sticking to planned price cuts despite increased costs, and has sufficient stocks to absorb any supply chain shocks, it said on January 15.
    • Marks & Spencer: The British retailer’s CEO said on January 11 that the company is expecting some slight delay in clothing and home deliveries due to the disruption to shipping.
    • Next: The British clothing retailer’s CEO on January 4 said sales growth would likely be moderated if disruptions continued through 2024.
    • Pepco: The Poundland owner warned on January 18 that its supply could be impacted in the coming months if the disruptions continue.
    • Primark: Associated British Foods’ finance director said on January 23 that Primark is coping with disruptions by adjusting timings and stock flow.

FAQ’s Red Sea

What is the outlook for rate development, especially after Chinese New Year?

Rates are expected to continue rising, albeit at a slower pace, leading up to the holiday. Following Chinese New Year, we can anticipate some stabilization in rates, which will depend on factors such as capacity utilization and demand. As a result, adjustments to surcharges may be made accordingly. However, it is still too early to provide a definitive forecast at this moment. We will continue to monitor the situation closely and provide updates as necessary.

Do the increased rates apply to all routes, or specific routes and trade lanes?

We’re experiencing a surge in rates on the Asia-Europe & Mediterranean routes as a result of detours around the Cape of Good Hope. Likewise, we’re observing a similar upward trend for other Asia-bound and transatlantic routes.

Is the cost impact of the additional fuel due to the longer transit time offset by the savings from not having to pay the Suez Canal toll?

Navigating around the Cape of Good Hope (COGH) incurs significantly higher costs compared to transiting through the Suez Canal. This increase is primarily due to elevated fuel expenses, as up to 40% more fuel is required to sail around COGH compared to the Suez route. Additionally, maintaining a weekly string necessitates more vessels, which further escalates operational costs.

How long are the delays related to the re-routing?

We’re experiencing delays that add approximately 20 to 50 percent additional transit time. This translates to an extra 7-10 days for routes into Europe and about 10-14 days into the Mediterranean from Asia.

We understand that these developments may pose challenges to your supply chain and business operations. Our team is closely monitoring the situation and will provide updates as necessary. Thank you for choosing FSL, we remain committed to providing you with the highest level of service and ensuring your safety. Please feel free to reach out to our customer service or sales team if you need any further assistance related to this. Please write to us at info@freightsystems.com. 

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