Red Sea crisis

Red Sea crisis threaten global supply chain

 

 

It’s been over 100 days since the start of the Red Sea crisis as commercial ships avoided the critical Suez Canal and were diverted via the Cape of Good Hope in southern Africa to avoid attacks by the Houthi rebels of Yemen. The trade continues to bear the brunt of the diversion with delay in shipment reaching the destination in Europe and the US on time and sea freight increasing steadily. For instance, freight by sea to Europe and the US from India has increased over $1,500 per box in the last couple of months to Europe and the US and by air the freight has more than doubled.

Some of the urgent shipments are being sent by air but at a premium as space is a constraint with the slow diversion of cargo from sea to air.

Nearly 90 per cent of the global trade is moved via sea. The Red Sea connecting Asia and Europe via the Suez Canal handles nearly 12 per cent of the global trade with large ships carrying everything, right from electronics goods to machinery, oil and gas to automobiles.

In the last three months, the Houthi rebels have been targetting ships in the Bab el-Mandeb strait between Dijibouti and Yemen in the southern end of the narrow strait - 20 miles wide - of the Red Sea.
Due to the disruption in the Red Sea, the pressure is slowly building up on the global supply chain as inventory in the consuming markets are getting over fast.

In a month or two, the pressure will build up on the suppliers in India for delivering the products. An effective supply chain action management plan will be required going forward, said an official in charge of logistics at a large leather company in Chennai.
At present, the delay to send the cargo to Europe or the US is around 20 days due to the diversion via the Cape of Good Hope. However, if the delay continues for over a month, there will be increased pressure from the clients to deliver the goods on time.
Many clients work on Fee on Board basis wherein they take care of the entire logistics and also the freight. While this could be a short term relief for the supplier, the client, who need to bear the additional cost, in future will ask suppliers to reduce their price, the official said.

Suppliers delivering goods on Cost, Insurance and Freight basis are under tremendous pressure to immediately absorb the increase in freight and also responsible to send the cargo on time, said an official of a leading Custom House Agency. While they would like to increase the cost of the goods, the clients are not willing to pay, he said.
The United Nations Conference on Trade and Development (UNCTAD) estimates that ships passing the Suez Canal decreased by 42 per cent compared to its peak. With major players in the shipping industry temporarily suspending Suez transits, weekly container ship transits have fallen by 67 per cent and container carrying capacity, tanker transits and gas carriers have experienced significant declines.

Growing significantly since November 2023, the surge in the average container spot freight rates registered the highest ever weekly increase growing by $500, - in the last week of December 2023. This trend has continued. Average container shipping spot rates from Shanghai more than doubled since early December, growing more than threefold to Europe and even above average to the US West coast, despite not going through Suez, the UNCTAD said.
Meanwhile, there are media reports that both Russia and China are in talks with the Houthi rebels to allow their ships to pass through the Red Sea.

Lars Jensen, an expert in the container shipping industry based in Denmark, in a social media post said that the shipping giant Maersk has issued a statement that they still deem the risk in the region (Red Sea) to be elevated despite the naval presence. They will therefore for the time being continue to sail around Africa and will only revert to the Red Sea transit when such a change can be sustained for the long term.

 

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