Exporters Seek Alternative Routes as Red Sea Disruptions Disrupt Supply Chains
Exporters around the world are facing challenges in getting their goods to retailers as disruptions in the Red Sea cause disarray in freight supply chains. Iran-backed Houthi militants in Yemen have increased their attacks on vessels in the Red Sea since November 19, causing disruptions in the key trade route that links Europe and North America with Asia via the Suez Canal. As a result, container shipping costs have surged, more than tripling in some cases, as companies look for alternative routes to move their goods.
Impact on Consumer Goods Sector
The consumer goods sector, which supplies top retailers like Walmart and IKEA, is expected to face the biggest impact if the disruptions in the Red Sea continue. S&P Global has warned that extended disruptions could have a significant impact on the sector. Alan Baer, CEO of OL USA, advises shipping and logistics clients to prepare for at least 90 days of disruptions in the Red Sea. The timing of these disruptions during the Christmas season adds to the challenges faced by exporters.
Seeking Alternative Routes
Companies are now exploring alternative routes to transport their goods. Some are turning to intermodal transport, which involves using two or more modes of transportation. For example, goods can be transported by sea to a port in Dubai and then loaded onto planes. This alternative route allows companies to avoid the danger zone in the Red Sea and the longer voyage around the southern tip of Africa. However, air freight is not a blanket solution due to its higher cost compared to sea freight.
Higher Costs and Impact on Trade
Moving goods by air costs significantly more than by sea, making it less feasible for many companies. Brian Bourke, global chief commercial officer at SEKO Logistics, explains that if the time it takes to get goods to shelves doubles, more shippers will switch to air freight, especially for high-value goods like designer clothing and high-end electronics. The disruptions in the Red Sea have a significant impact on global trade, as approximately 10 percent of global GDP is represented by goods moved through the Red Sea region annually.
Challenges for US Retailers
US retailers such as Walmart, Target, Macy’s, and Nike heavily rely on the Red Sea route to transport goods from various countries. The disruptions in the Red Sea have led to increased costs for diverting around Africa, which can add up to 30 days to transit times. This has the potential to increase the price of fuel and goods into Europe substantially. Tailwind Shipping Lines, a subsidiary of German discount supermarket chain Lidl, is currently shipping goods around the Cape to maintain its schedule.
Uncertainty and Compounding Difficulties
Shipping companies are uncertain about the new international navy coalition being assembled by the United States to stabilize the area. The success of this coalition in preventing further attacks and making the route safe again is crucial for European companies that rely on the Suez Canal to ensure a steady supply of clothes from Asia. Additionally, challenges are compounded by the severe drought affecting the Panama Canal, which has reduced the number of ship passages allowed. There is also a race to get goods in transit before Chinese New Year factory closures, which can disrupt supplies for a month or longer.
Fees and Surcharge
Large container ship owners have started adding fees, including emergency surcharges, for cargo affected by the disruptions in the Red Sea. French shipping group CMA CGM announced fees of $1,575 per 20-foot container, $2,700 per 40-foot container, and $3,000 for refrigerated containers and special equipment for cargo traveling to and from Red Sea ports.
Conclusion
The disruptions in the Red Sea have caused significant challenges for exporters and supply chains around the world. As companies seek alternative routes to transport their goods, intermodal transport is becoming a popular choice. However, the higher cost of air freight compared to sea freight poses challenges for many companies. The impact on the consumer goods sector, as well as US retailers and European companies, is significant. The uncertainty surrounding the new international navy coalition and other compounding difficulties further exacerbate the situation. As shipping companies face additional fees and surcharges, finding a solution to the disruptions in the Red Sea becomes crucial for the global trade industry.