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Further escalation in the Red Se...

Further escalation in the Red Sea: will supply chains face a repeat of the pandemic?
Source: AdobeStock/Val Traveller

Further escalation in the Red Sea: will supply chains face a repeat of the pandemic?

The Danish shipping company Maersk announced on January 2nd that it was suspending all sailings through the Red Sea and the Suez Canal. Houthi fighters fired at one of its vessels before the US Navy then intervened to thwart the attack. As a result of the security risks associated with potential Houthi attacks, more vessels are sailing around Africa again and prices for cargo transportation are already rising.

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Michał Pakulniewicz

Michał Pakulniewicz

03.01.2024

The Danish shipping company Maersk announced on January 2nd that it was suspending all sailings through the Red Sea and the Suez Canal. Houthi fighters fired at one of its vessels before the US Navy then intervened to thwart the attack. As a result of the security risks associated with potential Houthi attacks, more vessels are sailing around Africa again and prices for cargo transportation are already rising.

Further escalation in the Red Sea: will supply chains face a repeat of the pandemic?
Source: AdobeStock/Val Traveller

“Following the 30 December incident involving our vessel, Maersk Hangzhou, we have made the decision to pause all transits through the Red Sea / Gulf of Aden until further notice,” announced the Danish shipping line yesterday. The company added that the decision was made to protect sailors and cargo. In justified cases, ships will be sent around around the Cape of Good Hope.

Maersk initially suspended sailings through the Red Sea and the Suez Canal in December, when attacks by Yemen’s Houthi militants escalated on cargo ships off the coast of Yemen heading to the Suez Canal. The area of concern is the Bab al Mandab Strait – the gateway to the Red Sea.

About 12% of the ocean freight flows through the Suez Canal, representing a significant proportion of global trade (including the majority of oil from the Arabian Peninsula and the Persian Gulf region to Europe) and approximately 30% of container volume in the world. The vast majority of goods imported from Asia to Europe flow through the Suez Canal.

The importance of the Red Sea route and the threat of disruption to supply chains led the United States to announce an international coalition to ensure safe navigation in the waters around Yemen and the Red Sea. In response to the deployment of US Navy ships, Maersk had announced its return to the Red Sea. However, following the aforementioned attack, it indefinitely suspended its presence in the Red Sea.

Meanwhile, the situation around Yemen is escalating.  The Houthi rebels that attacked Maersk’s Hangzhou container ship were stopped by American helicopters. However, tension in the region is still rising after Iran announced that it would send its warship to these waters.

As it stands, the world’s two largest shipowners, MSC and Maersk, are not sailing through the Suez Canal. German shipping line Hapag-Lloyd has also decided to avoid the route and is currently sailing around Africa.

Nils Haupt, senior director in Hapag Lloyd’s corporate communications department, confirmed to Trans.Info that the suspension of sailings through the Suez Canal would continue until January 9. After this date, the German company will assess the situation and decide on further steps.

Why costs will increase

According to BIFA (The British International Freight Association), the consequences of the crisis in the Red Sea may include an increase in container rates and the appearance of additional fees, higher insurance rates, delays in deliveries, longer shipping times, empty sailings, as well as an increase in CO2 emissions.

Several of the above consequences are already visible. Container rates have increased significantly since the beginning of December. On December 1, the Freightos Baltic Index was USD 1,179 (for a 40-foot container). The following day (when the attacks intensified and just after the announcement of the coalition by the United States) it was already USD 1,346. The index ended 2023 at $1,341.

The index increases were even more visible on the route from China to Northern Europe. The index started December at $1,243 and jumped to $1,621 just before Christmas. At the end of the year, it amounted to $1,590. However, the incident with Maersk Hangzhou, together with the decision of the Danish shipowner to suspend sailings, will probably increase the value of the index for the next pubic quotation due at the end of this week.

In addition, CMA CGM announced on Tuesday an increase in rates (with additional surcharges) for goods transported from Asia to Mediterranean ports. While, for example, at the beginning of December, a 20-foot container to Adriatic ports cost 2.05 thousand dollars, after the January increase it is already 3.55 thousand dollars. Similarly, rates to ports in the Western Mediterranean Sea (from USD 2,000 to USD 3.5 thousand) and in the eastern part of the water area (from USD 2.1 thousand to USD 3.5 thousand) increased.

Longer journey times

As for delivery delays – having to sail around Africa instead of through the Suez Canal means approximately 7-10 additional days. In January and February this year, we can therefore expect significant delays not only in deliveries but also in the shipment of goods from Asia.

European ports are already preparing for delays

“The terminals at the Port of Algeciras are currently operating regularly, although during this first week of January we expect some ships less than usual due to the fact that shipping companies have chosen to border Africa in their lines from Asia, and some calls scheduled will be delayed a few days,” the Andalusian port told Trans.Info. The spokesperson added that the port has already adjusted the mooring schedule to optimise the terminal space and its resources.

Ships will arrive in European ports a week or two later. Therefore, containers that should be back in Asia or going back to Asia will still be in Europe, which will delay their shipment. Although there is transport capacity due to shipping lines having an oversupply of new container ships, the overall demand for goods is currently not very high. So no one will send empty ships on such long voyages.

Nevertheless, there will probably be no repeat of the pandemic. Nils Haupt from Hapag Lloyd believes that the current crisis will not be as dramatic as in 2020-21.

“Delays and probably minor congestion at some ports are to be expected. It won’t be as bad as during Covid as the pandemic was a global phenomenon and supply chains everywhere were completely disrupted. This time we don’t expect it, it won’t be as drastic,” says Nils Haupt.

Shippers’ dilemma

Importers and shippers are currently facing a dilemma, explains Lars Jensen, an expert in the field of maritime transport. On the one hand, they can choose a ship that will sail around Africa. Then they will definitely pay more, and their goods will reach their destination 8-9 days later.

“The risk is that Suez suddenly becomes viable and you get your cargo faster,” explains Lars Jensen in a post on Linkedin.

The second option is to use the services of shipowners that still sail through the Suez Canal – mainly smaller shipping companies, but also major lines.

Everyone will end up paying for the disruption

It should also be remembered that an increase in container rates ultimately also translates into an increase in the prices of final products.

Despite the common opinion that the war in Ukraine and the increase in oil prices were the main cause of rising inflation in Europe, it should be remembered that the prices of consumer products were already rising before the war.

And this is precisely because of the dramatic jump (by several hundred percent in 2020-21) in container rates as a result of pandemic supply chain congestion. And also, nomen omen, the blockade of the Suez Canal by the container ship “Ever Given.”

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