Red Sea/Suez Canal Crisis Disrupts Global Logistics

In this article, learn more about: 

• What's going on in the Suez Canal?

• Red Sea Disruptions' short- and long-term impact on global supply chain and shipping routes.

• How affected importers, suppliers, and manufacturers are navigating these disruptions.

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Red Sea Crisis Affects the Global Economy and Essential Supply Chain Networks

The Suez Canal, located in Egypt, is a crucial waterway connecting the Mediterranean Sea to the Red Sea and providing a shortcut between Europe and Asia and a key route to the US east coast for many Indian sub-continent origins. It is one of the busiest shipping routes globally, with about 12% of global trade passing through the Red Sea, including 30% of global container traffic and approximately 17,000 ships each year. Vessels traveling from Asia transit the 30-kilometer-wide Bab-el-Mandeb strait to access the Suez Canal, with nearly half of their freight consisting of containerized goods. 

Following the Israel-Hamas war, which began in early October 2023, the Iran-backed Houthi rebel group has intensified its attacks on commercial vessels navigating the Bab-el-Mandeb strait, recording over 30 incidents since late November 2023. A U.S.-led coalition has positioned warships in the region to protect commercial vessels and has launched several airstrikes on Houthi targets in Yemen, but that hasn't put a stop to Houthi attacks on vessels. These attacks have prompted most major shipping companies to suspend their Red Sea routes by shifting volumes to the Cape of Good Hope. The International Monetary Fund says maritime traffic through the Suez Canal is down 37% so far in 2024 from a year ago.

The ocean carrier CMA CGM became the latest ocean carrier to announce that it was suspending all container ship transits through the Suez Canal as of Feb. 1, joining Mediterranean Shipping Co., Maersk, and Hapag-Lloyd in the move to use the longer African Cape of Good Hope route due to ongoing Houthi attacks against commercial container shipping in the Red Sea. 

The New Route Has Both Transit and Cost Implications

- Transit: This alternative route adds approximately 6,000 kilometers to the total transit connecting Europe and Asia, extending the trip duration by at least 10 days. This means more vessels are required to maintain service schedules. Some apparel companies bringing in spring fashion have to wait for their goods. Some European apparel customers and other time-sensitive items are being diverted to airfreight to ensure they arrive on time.

- Cost: Ocean spot rates (one-time fees that shippers pay to transport a load at current market pricing) have soared due to the recent Red Sea shipping crisis. The cost of shipping a 40-foot container from Asia to Northern Europe has increased to over $4,700, a 226% increase since mid-December. Rates from Asia to North America's East Coast have climbed by 69% to $4,234. A further surge in shipping rates is expected as the crisis persists. Big companies that have longer-term contracts with ocean carriers are largely immune to spot-market swings. However, many such companies are paying 20% or more surcharges on top of contract rates to compensate for higher shipping costs such as fuel and insurance.

Asian, European, and American Trade Lanes Impacted

1. Asia to Europe

2. Asia to USEC (US East Coast)

3. Asia to USWC (US West Coast) -- indirectly, by reduced ocean capacity.  

Note: Although Asia and Europe are the most impacted, all trade lanes are impacted by the imbalance and a shortage of empty containers.

The Future Holds Longer Transit Times and Investments in Efficient Practices

Before the Red Sea situation, carriers were blanking 10-20% of sailings due to the lack of demand. This means there was excess supply in the market that could be put back into the network to compensate for longer transit times, so carriers can maintain this new routing for the foreseeable future if needed.

The Houthi attacks are expected to continue for the short and medium term, despite the US military intervention and exchange of gunfire. The Houthis continue their focus on attacking merchant/container vessels, which indicates that US military involvement will not deter their actions. These Houthi attacks have been justified as a response to the Israeli military activity in Gaza. Any changes between Israel and Hamas could potentially reduce tensions in the region and help reduce the number of attacks. However, the Houthis can also leverage the attacks to enhance their position in peace talks with Saudi Arabia and to achieve recognition as Yemen's legitimate government.  

How to Build a Resilient Supply Chain in a Crisis

To navigate these types of disruptions successfully, importers/businesses can adopt effective strategies that ensure minimal disruption to their businesses.

- Strengthen Communication: Establish clear lines of communication with your suppliers, logistics providers, and customers. Regularly communicate with them to ensure everyone is aware of the challenges faced and plans to address them. Transparency and collaboration are key to overcoming disruptions effectively. Don't forget your internal stakeholders (finance department, CFO, etc.) and notify them that logistics/freight costs will be higher than expected/budgeted.

- Monitor and Analyze the Situation: Keeping a close eye on the situation in the Red Sea region is crucial for importers. Regularly monitoring news updates, industry reports, geopolitical developments, insights from reliable sources, and security advisories will help importers stay informed and make strategic decisions. Establishing reliable sources of information and maintaining open communication with partners and suppliers in the region will enable importers to respond swiftly to any changes or emerging risks. Compile as much data as possible to make data-based decisions.

- Evaluate Inventory Levels: Assess your inventory levels and consider increasing safety stock to buffer against potential delays or shortages. Collaborate closely with your suppliers to understand their inventory capabilities and plan accordingly. Maintaining adequate stock levels can help you navigate through disruptions without major disruptions to your operations.  

- Explore Alternative Transport Modes: Consider alternative modes of transport, such as air freight or rail, to bypass the affected regions. While this may involve additional costs, it can provide faster transit times and reduce reliance on disrupted ocean routes. Evaluate the trade-off between the extra costs of rerouting freight and the costs involved with not being able to deliver freight on time.  

- Collaborate with Government and Industry Bodies: Importers should actively engage with government agencies and industry bodies to gain insights and assistance regarding the Red Sea disruptions. Participating in trade associations, attending industry conferences, and seeking guidance from relevant governing bodies and industry experts can provide importers with valuable information, resources, and support. Collaborating with these entities can also help influence policy decisions and ensure the protection of business interests.

- Review Force Majeure Clauses: Review your contracts, specifically force majeure clauses, to understand your rights and obligations in case of unforeseen events. Consult legal experts to ensure you are protected, and explore possible negotiation options with suppliers to minimize financial and operational risks. Your business's legal team can help guide and protect in cases such as this.

- Diversify Supply Chains: In times of disruption, diversifying your supplier base and shipping routes can help mitigate risks. Importers should consider diversifying their supply chains by exploring alternative routes and sources. Relying solely on any particular routes, ports, or locations can be risky in times of disruption. Identifying alternative routes and conducting thorough due diligence on potential suppliers will help mitigate any potential disruptions. This may involve exploring other shipping routes, ports, or even considering air freight options to maintain a steady flow of goods. Be prepared to engage/negotiate spot rates vs. contract rates. 

- Strengthen Risk Management Protocols: Effective risk management protocols are vital during times of disruption. Importers must conduct a comprehensive risk assessment and develop contingency plans to address potential disruptions in the Red Sea region. This may involve diversifying suppliers, stockpiling critical goods, or establishing alternative shipping routes. Regularly review and refine your plan to stay prepared for future disruptions. Additionally, importers should review and update their insurance policies to ensure adequate coverage for any unforeseen events.

- Maintain Strong Relationships with Partners and Suppliers: Maintaining strong relationships with partners and suppliers is crucial for importers facing disruptions in the Red Sea region. Open communication, regular updates, and coordinated efforts with key stakeholders will help minimize the impact of disruptions on the supply chain. Collaborating with suppliers to identify potential bottlenecks, find alternative solutions, and share best practices can ensure the smooth flow of goods and mitigate any potential delays or shortages.

- Invest in Technology and Automation: Leveraging technology and automation can significantly improve an importer's ability to manage disruptions effectively. Implementing advanced supply chain management systems, adopting digital platforms, enabling robust real-time tracking, and predictive analytics can enhance visibility and enable importers to address disruptions proactively. Investing in these technologies will not only streamline operations but also provide valuable data for future risk assessments and decision-making. 

How Suppliers Can Build Greater Resilience with SupplyPike

The recent disruptions in the Red Sea region pose significant challenges at vital ports and create challenges for industries counting on access. The current situation in the Middle East impacts freight rates, adding long distances and costs to routes and production. However, the impact is minuscule compared to the factors endured during the COVID-19 global pandemic.

By adopting proactive management strategies, importers can effectively navigate these disruptions and minimize their impact on business operations. Diversifying supply chains, monitoring the situation, collaborating with relevant entities, strengthening risk management protocols, maintaining strong relationships, and leveraging technology are key steps importers can take to ensure resilience and continuity. 

By implementing these strategies, importers can navigate the recent disruptions in the Red Sea with resilience and agility, mitigate risks, and maintain a competitive edge in the face of ongoing disruptions.

SupplyPike offers solutions for winning back lost revenue, supply chain management, and root cause analysis. SupplyPike's software helps you get clear analysis to discover, understand, and correct issues in your supply chain before they hit your bottom line.

Schedule a demo with the team to see if SupplyPike is right for your retailer business.