Attacks in the Red Sea
“Companies are willing to pay considerable prices to avoid empty shelves”
January 20, 2024, 9:41 a.m
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It seems as if the Houthis’ attacks have no impact on supply chains. But how resilient are they really? In an interview, expert Eric Fullerton from the logistics service provider Project44 explains why the effects have so far been delayed and who will pay the price in the end.
ntv.de: Since the end of last year, one of the most important trade routes in the Red Sea has been under attack by the Houthis. A number of shipping companies are rerouting their ships because of this. What challenges does the industry face?
Eric Fullerton: The ships in this area face a difficult decision. Do they accept the increased risk, do they circumnavigate Africa or do they anchor in their current position and wait for safe passage? We currently estimate that 271 ships are sailing around Africa. One might get the impression: a few hundred ships, that’s not a big deal. But we are talking about 4.5 million containers here. That’s a total of about $225 billion worth of goods. Five other ships are currently staying at their current location and monitoring the development of the conflict. Despite the initiation of Operation Prosperity Guardian, these ships avoid passage. This suggests that shippers continue to doubt the safety of the Red Sea.
Shipping traffic has not yet come to a complete standstill.
Eric Fullerton is a senior director at Project 44, a US-based supply chain manager. The company describes itself as a specialist in technology and logistics and offers solutions to make supply chains and flows of goods more visible and therefore easier to plan.
The number of ships still passing through the canal has fallen by 77 percent since the attacks, to an average of 3.4 ships per day. Before the attacks it was 15 ships per day. The ships that currently feel safest and are therefore not afraid of the route are ships heading to Southeast Asia and China. They are not the focus of the Houthis.
How much longer is the route that the ships now have to take?
This of course depends on the port of call. However, transit time has increased for containers on all routes. The delays are not yet fully reflected in the container transit times. However, the changes in the ship schedules provide an indication of the upcoming developments. On average, the ships now take 7 to 20 days longer.
How much additional cost does this involve?
A ship that takes the detour around the Cape of Good Hope alone has an increased fuel consumption of a million dollars. And hundreds of ships are now taking this detour. The costs for the crew, supplies, etc. are not included.
The costs for freight rates have also climbed to dizzying heights.
The overall freight index for a 40-foot standard container is up 23 percent week-over-week and 82 percent year-over-year. The increases for certain routes, especially from Asia to Europe and the Mediterranean, were over 150 percent.
Will these additional costs also affect consumer prices?
Companies have the option of covering the resulting costs themselves. That would then have no effect. However, most likely the costs will be passed on to consumers, which would contribute to continued inflation.
Can companies also switch to rail or air transport?
Yes absolutely. Air transport is the fastest way for shippers and businesses to overcome delays and disruptions. However, it is also the most expensive. Keep in mind that we are talking about hundreds of billions of dollars in freight volume and that air transportation is, on average, five times more expensive than sea transportation. In the last few weeks, air freight prices have risen by around 15 percent – and they will stay that way. The decision companies have to make now is: What will hurt me more? Empty shelves, the interruption of a manufacturing or production line or the significant additional costs?
When will consumers start to feel the disruption to the supply chain?
The increased transit times will impact inventory levels worldwide. Ordering processes are often methodical and based on averages and historical demand. Because these delays occurred unexpectedly, companies were unable to proactively respond to this situation. This may result in some products not being available on time.
So far, many experts have been reassuring: the Houthi attacks have no immediate impact on deliveries.
The impact of supply chain disruptions is not immediately felt by consumers. That’s why Christmas business was not affected. The tide is now turning somewhat. The first shortages in inventories could become noticeable in February. I think many companies are willing to pay significant prices to avoid empty shelves. At first glance, this is good for the consumer. Ultimately, however, they will feel the additional costs of fuel, containers and surcharges. Companies are trying to protect their profit margins and cash flow, which means passing costs on to consumers.
Which industries are particularly susceptible to stock outages and bottlenecks in the production process?
In principle, every industry is affected. After all, a significant proportion of global freight traffic passes through the Red Sea and the Suez Canal. However, sectors operating under the just-in-time (JIT) ordering model will feel a greater impact. This applies, for example, to the automotive industry.
Are the current problems child’s play compared to the corona pandemic?
Supply chain technology has experienced a real boom, especially after Corona. A number of companies are now benefiting from this. The problems with the supply chains during Corona are difficult to compare with the current situation. However, one can certainly say: Similar to during the pandemic, we don’t know now: How long will the attacks last? However, the Houthi rebel attacks in the Suez Canal have a greater impact on certain routes than others. This will be felt more strongly in Europe than in the USA.
Is world trade even realistic in the long term without this shortest route between Asia and Northern Europe?
Not in the long term. After all, 30 percent of all container traffic goes through the Suez Canal. The Houthi attacks could continue for months. Because of its effectiveness alone, the Suez Canal will always remain a viable option. The detour around the Cape of Good Hope simply takes significantly longer and costs more.
Juliane Kipper spoke to Eric Fullerton