Shipping Titans Battle Soaring Freight Expenses and Cargo Turbulence Amidst Red Sea Upheaval

Amid ongoing Red Sea diversions by shipping giants like Maersk, logistics managers globally are confronting a dual challenge of escalating ocean and air freight prices alongside cargo disruptions due to heightened security risks posed by the Houthis. These threats compound the challenges faced by the global supply chain, which has weathered three chaotic years marked by inflationary pressures and pandemic-related delays that had recently shown signs of abating.

Ocean freight prices experienced a sudden surge on Thursday as more vessels diverted from the Red Sea. Reports indicate that logistics managers received quotes of $10,000 per 40-foot container for the Shanghai-to-U.K. route, a substantial increase from the previous week’s rates of $1,900 for a 20-foot container and $2,400 for a 40-foot container. Truck rates in the Middle East have also more than doubled.

Alan Baer, CEO of OL USA, emphasized the need for clarification as ocean carriers grapple with the added costs of rerouting vessels. Baer highlighted that the rapid adjustments in pricing are not solely attributed to changes in supply and demand but rather stem from real-time redirection of vessels, constituting a significant shift from the gradual build-up in freight prices during the Covid-19 pandemic.

As of Thursday, 158 vessels, carrying over 2.1 million cargo containers and valued at $105 billion, were diverted from the Red Sea. The ongoing attacks by the Houthis indicate a lack of short-term resolution.

IKEA acknowledged the potential impact on product availability, citing delays and potential constraints due to the situation in the Suez Canal. Other companies, like Danone, disputed significant short-term impacts on their supply chain, closely monitoring the situation with their suppliers and partners.

Vessels move on global water routes called “strings,” and containers from around the world can be on a single vessel as a result of the different ports a vessel will visit on its string. When a vessel is delayed because of re-routing, that means all shippers from a multitude of countries who have cargo on that vessel, or are waiting for that vessel to pick up their containers, are faced with delays.

While logistics managers have no control over containers presently on the re-routed vessels, they do have control over stranded containers that are not being picked up in European or Middle Eastern ports, and import containers in Asia getting ready to be loaded on vessels.

CEOs in the logistics industry have informed that they are actively addressing the challenges posed by redirected cargo. For cargo deemed “stranded” in Europe or the Middle East, there is a consideration of transporting select products by air as a potential solution. U.S. shippers are exploring alternative trade routes such as the TransPacific to the West Coast and even the Panama Canal to access Gulf and East Coast ports, with decisions hinging on a careful analysis of transit time and freight costs.

Potential Middle East alternatives like Dubai and Aqaba are currently under review. Agility and adaptability are crucial for logistics to ensure the smooth flow of trade. Major ocean carriers, including Maersk, CMA CGM, and Hapag Lloyd, have invested in their logistics supply chain management, collaborating with other logistics firms to exert greater control over their clients’ container fate and respond swiftly to crises.

Maersk, boasting more than 20 aircraft with regular global flights, leverages partnerships with major airlines to transport freight in their belly space. Additionally, cargo can be moved via rail. To address ports inaccessible to rerouted ships, smaller feeder vessels are being deployed to pick up containers, transporting them to larger ports for loading onto vessels with greater capacity for the extended ocean journey.

Shippers turn to Airfreight

In light of the Suez disruption, U.S. shippers have multiple ocean route options, while European shippers, heavily reliant on the Suez, face longer transit times and are turning to air freight to move their products. Freightos’ Judah Levine noted a 13% increase in air freight prices this week, reflecting a surge in demand due to the shift from ocean to air transport.

Brian Bourke, Chief Growth Officer of SEKO Logistics, emphasized that the impact on the global supply chain depends on the duration of rerouting. He anticipates a gradual shift from ocean to air freight, starting with higher-value goods like consumer electronics, luxury consumer products, and fashion apparel. This shift is driven by the need to move goods faster and mitigate increased inventory carrying costs associated with longer lead times.

HMM, a shipping company, conveyed to clients that, given the complex circumstances, they face a decision between implementing an undetermined waiting period or exploring alternative routes with additional costs.

Global Inflation Warning Amidst Ocean Freight Surge

The sudden escalation in ocean freight costs and its potential inflationary repercussions hinge on the duration of vessel rerouting and how long shippers endure elevated freight expenses. Logistics CEOs shared that once the timeline surpasses the one-month mark, inflationary pressures will manifest in the supply chain, eventually affecting consumers.

MSC, the world’s largest ocean carrier, previously raised rates from India by 30-40%, as reported by CNBC.

Logistics CEOs, including Alan Baer, questioned the rapid increase in rates from India to the U.S. East Coast, rising from approximately $2,000 per 40-foot container to $7,000 per 40-foot container within just 30 days. Baer expressed concerns about whether this rate hike genuinely reflects the necessary level to recover costs or if carriers are capitalizing on the global community’s unfortunate situation.

Shippers emphasize the need for transparent communication on cost increases, particularly as ocean carriers no longer incur the $500,000-$600,000 toll to traverse the Suez Canal but are still implementing rate hikes. Retailers associated with the American Apparel and Footwear Association are closely monitoring the Red Sea situation, urging the swift deployment of Operation Prosperity Guardian to safeguard this crucial waterway.

Source: CNBC