Recent attacks on cargo ships in the Red Sea are adding another layer of complexity to the already strained global supply chain due to COVID-19. The assaults, attributed to Yemen-based Houthi militants, are forcing ships to divert from the Suez Canal, significantly impacting trade routes connecting Asia with Europe and the United States.
The disruptions are compounding existing challenges such as pandemic-related port logjams and the Russia-Ukraine conflict. Ryan Petersen, CEO of supply chain management company Flexport, describes the current situation as “short-term chaos,” leading to increased costs and logistical challenges.
The attacks have prompted ships to reroute around the tip of Africa, causing major delays and cost escalations. To aggravate further, all of this comes at a time when the world – especially the West – is grappling with a resurgence of inflation. On the other hand, things are worsening for the shipping industry which is facing a double whammy with low water levels in the Panama Canal due to drought, and the rush to move goods before the Lunar New Year shutdown of Chinese factories.
Various sectors are experiencing the repercussions of these disruptions. Electric carmaker Tesla is temporarily shutting down its Berlin factory due to shipment delays, while Volvo and Suzuki have faced production stoppages in Belgium and Hungary, respectively, because of delays in receiving key components. The British retail chain Marks and Spencer is warning of delays in its spring collections, affecting both clothing and home goods. Roughly 20% of the clothes and shoes imported into the U.S. arrive via the Suez Canal, said Steve Lamar, CEO of the American Apparel and Footwear Association. For Europe, the impact is even bigger as 40% of clothes and 50% of shoes traverse the Red Sea. Man and Machine (A Maryland company that makes hospital supplies) is awaiting a shipment from Taiwan and China. It has been one setback after another for the company, which makes washable keyboards and accessories for hospitals and other customers.
The cost of shipping containers from Asia to Europe has surged significantly. A standard 40-foot container’s shipping cost from Asia to northern Europe has risen from less than USD 1,500 in mid-December to nearly USD 5,500, according to Freightos. Getting Asian cargoes to the Mediterranean is even costlier: almost USD 6,800, up from USD 2,400 in mid-December. Delays and rerouting have contributed to the rise, with around 25% of global shipping capacity being diverted from the Red Sea, according to Flexport.
The longer the disruptions in the Red Sea persist, the greater the threat to global trade and food security. Ryan Petersen warns that a year-long disruption could increase goods inflation by up to 2%, adding to the challenges of higher prices for essential goods.
Global shippers are forced to make costlier journeys, and companies are under pressure to review their supply chains to adapt to this new normal of longer transportation distances. The UN shipping expert Jan Hoffmann has raised concerns about potential impacts on global food security, particularly in regions dependent on wheat from Europe and the Black Sea.
As companies muddle through the challenges, there is a consensus that the market needs to adjust to longer transit times. The disruptions serve as a reminder that long-distance supply chains are now more susceptible to unexpected risks, ranging from geopolitical tensions to public health crises and climate-related issues.
In response to the ongoing threats, the European Union has tentatively agreed to deploy ships to the Red Sea to protect commercial vessels from Houthi attacks. Asian countries, including Singapore, have also pledged to participate in operations to secure the vital sea route.