Posted on January 18, 2024
Global shipping news

The Red Sea Crisis Explainer

Why is the Red Sea Considered Strategically Important?

The Red Sea plays a crucial role as a primary route for container shipping and international trade, connecting the Indian Ocean to the Mediterranean Sea through the Suez Canal. Approximately 15% of the world’s shipping traffic traverses this strategically important waterway, making it the swiftest pathway between Europe and Asia.

In January 2023, as reported by Statista, a staggering 123.5 million metric tons of goods were transported via Egypt’s Suez Canal, and throughout 2022, more than 22,000 ships successfully navigated this canal. This route accounts for 12% of global trade by volume, underscoring its immense significance in the global economy.

What Happened?

In recent times, the Red Sea has witnessed a notable escalation in regional tensions, resulting in assaults on commercial ships. These incidents are intertwined with broader geopolitical disputes that have an impact on this crucial trade corridor. The attacks have primarily occurred in proximity to the Bab al-Mandab Strait, resulting in substantial changes in the patterns of maritime traffic.

What Impact Has the Disruption in the Red Sea Had on Shippers?

The shipping landscape in the Red Sea region has been severely disrupted by an ongoing crisis. Major shipping companies such as Maersk and others have encountered threats to their vessels, resulting in decisions to reroute and temporary operational halts.

According to analysts, there has been a staggering 60% drop in fleet capacity passing through the Suez Canal during the three-week period spanning from December 18 to January 7, in comparison to the same period in the previous year. The number of TEUs (twenty-foot equivalent units) has decreased from 3.3 million to just under 1.3 million as carriers increasingly opt for safer routes. However, these alternative routes, such as the one around the Cape of Good Hope, though more secure, are longer and more costly, resulting in higher fuel expenses and increased insurance premiums.

Furthermore, data from Xeneta reveals a significant surge in ocean freight shipping rates between the Far East and North Europe, with a staggering 124% increase since the crisis escalated in mid-December 2023. Rates between the Far East and the US East Coast have risen by 45%, and rates into the Mediterranean have surged by 118%.

The situation may exacerbate in the coming weeks as shipping companies rush to dispatch orders from China before factories close down for the Lunar New Year holiday.

How Does the Red Sea Crisis Affect Consumers?

The repercussions of the Red Sea attacks are reverberating worldwide and are expected to impact consumers directly. The rising shipping expenses, driven by the necessity to alter routes and increased insurance costs, are likely to result in higher prices for a variety of consumer goods.

Be prepared for potential delays in accessing your favourite products at stores. The challenges in the Red Sea region are compelling container ships to opt for the longer Cape of Good Hope route, extending their voyage times by approximately 10 days and covering an additional 3,500 nautical miles.

Prominent global retailers like Ikea have issued warnings regarding potential disruptions in their supply chains should these shipping issues persist.

To alleviate the growing delays caused by the Red Sea crisis, shipping companies are exploring the option of using airfreight selectively. Interestingly, airfreight rates have not exhibited any significant changes thus far, despite the maritime disruption. However, this is anticipated to change soon, potentially exacerbating inflationary pressures.

What Steps Should Shippers Take?

During extraordinary events like the Covid-19 pandemic, shippers have often accused carriers of capitalizing on tragic circumstances, while carriers contend that shippers have been hesitant to pay sustainable rates. In the dynamic world of the shipping industry, supply and demand dynamics play a pivotal role, creating a mutual influence that can be both beneficial and challenging.

To navigate these complexities, shippers should formulate a comprehensive plan and engage in discussions with shipping lines and logistics providers. This proactive approach will enable them to gain a deeper understanding of the situation and take necessary measures to safeguard their supply chains.

Here are some essential actions shippers should consider:

  • Promptly book space on ships and aircraft to ensure timely transportation of goods. Collaborate closely with freight forwarders and carriers to secure the required capacity for shipments.
  • Verify that there are an adequate number of containers and ship space to transport goods. Work in tandem with freight forwarders and carriers to guarantee the availability of necessary equipment.
  • Strive to expedite the movement of goods to prevent excessive inventory buildup. This approach helps avoid additional expenses associated with storing goods for extended periods.
  • Take swift action to secure essential capacity for shipments, especially considering the traditional capacity constraints leading up to the Chinese Lunar New Year.
  • Anticipate the need to pay higher ocean freight shipping rates, as was necessary during the pandemic and is now critical in the face of the Red Sea crisis, categorised as another exceptional event. This willingness to invest in reliability and stability will enable shippers to secure vital capacity and equipment for on-time transportation of their goods.

By taking these proactive steps, shippers can better adapt to the volatile landscape of the shipping industry and ensure the continuity of their supply chains.

What Actions Should Logistics Companies Take?

Amidst the Red Sea crisis, logistics companies have several strategic options to consider:

1. Utilize Accessible Sea Routes:

  • Consider utilizing accessible ports such as Jeddah (KSA), Djibouti (Djibouti), Berbera (Somaliland), Port Sudan (Sudan), Aden (Yemen), Hodeidah (Yemen), and other unaffected ports in the Middle East/Arabian Gulf.
  • Explore seamless land transport connections from ports like Jebel Ali or Khalifa Port to maintain supply chain continuity.

2. Leverage Airfreight from the UAE:

  • Recognize the importance of airfreight as a reliable alternative for transporting cargo from China and other regions, particularly when sea routes face heightened risks.
  • Local airports in the UAE can serve as key departure points for urgent shipments, offering a secure and swift solution during uncertainties in sea routes.

3. Consider Land Transport from Khalifa Port and Arabian Gulf Ports:

  • For regional destinations such as Jordan, Syria, Lebanon, and parts of KSA, evaluate the cost-effective option of land transport from Jebel Ali or Khalifa Port.
  • This alternative provides a seamless and budget-friendly solution for clients seeking to transport goods to neighbouring nations, especially in a context of high airfreight demand. Keep in mind that regional land transport capacity may be limited.

4. Explore Rail Transport from China to Europe:

  • Recognize the growing popularity of rail transport from China to Europe as a sustainable and efficient option for specific shipments.
  • Capitalize on the increasing demand for diversified transportation methods to meet your clients’ evolving needs.

By considering these strategic options, logistics companies can navigate the challenges posed by the Red Sea crisis and provide reliable and adaptable solutions for their clients in an ever-changing global logistics landscape.

The Red Sea Crisis Explainer

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