Houthi rebels in Yemen are disrupting a vital global commerce route by attacking ships in the Red Sea, forcing them to do more expensive and time-consuming circumnavigations of Africa.
Both Belgium and Germany have idled their automobile manufacturing. One of the biggest department stores in Britain is delaying their spring fashion ranges. A hospital supplies company in Maryland is unsure of when to anticipate parts from Asia.
In addition to pandemic-related port bottlenecks and the Russian takeover of Ukraine, attacks on ships in the Red Sea are causing yet another disruption to global trade.
In an attempt to halt Israel’s campaign against Hamas in Gaza, Yemeni rebels known as the Houthi group are assaulting cargo ships that travel the waters between Asia and Europe and the US, diverting commerce from the Suez Canal and around the African tip. The disruption is increasing expenses and creating delays at a time when inflation is still on the rise globally.
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“We’re experiencing temporary disorder at this time, and disorder inevitably results in higher expenses,” stated Ryan Petersen, CEO of Flexport, a supply chain management company. Ten thousand containers are carried by each ship that is diverted. Many phone calls and emails are being exchanged in an attempt to reschedule every container voyage.”
Adding to the chaos in international shipping is a “double whammy,” according to Petersen: Low water levels brought on by the drought prevent travel through the Panama Canal, another vital commerce route. Also, shippers are rushing to get cargo out before Chinese industries close for the Lunar New Year holiday, which falls between February 10 and 17.
The longer the Gaza battle rages, the greater the threat. According to Petersen, a year-long disruption to Red Shipping may cause a 2% increase in goods inflation, adding to the suffering already experienced by individuals across the world due to rising costs for rent, groceries, and other necessities. Further increases in interest rates, which have damaged economies, might result from this.
Man & Machine, situated in Greater Landover, Maryland, is now waiting on cargo from China and Taiwan. The company, which manufactures washable keyboards and accessories for hospitals and other clients, has been experiencing a string of setbacks.
About once a month, founder and CEO Clifton Broumand receives a supply of components; however, the most recent cargo, which left Asia four weeks ago, is running behind schedule. The Houthi attacks have closed the standard route, which takes three weeks via the Suez Canal.
The cargo was halted at the Panama Canal due to the mess caused by the drought, therefore rerouting to that location also failed. It may now need to travel across the Pacific to Los Angeles before arriving in Maryland by ship or train. Broumand is clueless as to when the goods will be delivered.
It’s both interesting and irritating. I think that everyone knows, including our customers. “Who knew? This isn’t like, ‘Why didn’t you plan this?'” he exclaimed. We inform our clients over the phone that there will be a delay. This explains why it is. Although nobody enjoys it, it’s only another source of annoyance and won’t harm anyone.
Similar issues are being faced by other industries.
Due to complications, electric vehicle company Tesla is forced to close its manufacturing near Berlin from Monday through February 11. This month, the Swedish automaker Volvo, which is controlled by China, shut off its Ghent, Belgium, production line for three days to await a critical component for its transmissions. The factory produces station wagons and SUVs.
A week-long production stoppage occurred at a Suzuki Motor Corp. plant in Hungary as a result of a delay in receiving engines and other parts from Japan.
In February and March, the British retail group Marks & Spencer issued a warning, stating that the unrest may result in a delay in the release of new spring clothes and home goods collections. Stuart Machin, the CEO, stated that the crisis in the Red Sea was “affecting everyone and something we’re very focused on.”
According to Steve Lamar, CEO of the American Apparel & Footwear Organization, the Suez Canal is used to import about 20% of the clothing and footwear that is brought into the United States. The impact is significantly greater for Europe: The Red Sea has been crossed by 40% of clothes and 50% of shoes.
“The maritime shipping industry is facing a crisis that affects the entire world,” Lamar stated.
According to Flexport, approximately 25% of the world’s shipping capacity is being or will be redirected from the Red Sea as of January 19, lengthening the duration of travel by several thousand kilometers and a week or two.
From less than $1,500 in mid-December to about $5,500, the cost of shipping a typical 40-foot container from Asia to northern Europe has increased significantly. According to the freight booking engine Freightos, the cost of shipping Asian cargoes to the Mediterranean has increased even further, rising from $2,400 in mid-December to nearly $6,800.
However, things might be worse. Two years ago, at the height of supply chain problems, shipping a container from Asia to northern Europe cost $15,000, while shipping one from Asia to the Mediterranean nearly cost $14,200.
“We’re far from comparable to understanding what was happening during the global epidemic as a result of industry disruptions,” economics Katheryn’s Russ of the University of California, Davis stated.
Driven by the COVID-19 lockdowns and armed with government relief checks, American consumers embarked on a purchasing binge in 2021 and 2022, ordering sports equipment, furniture, and other products. Their overwhelming orders caused delays, shortages, and price increases in manufacturers, ports, and freight yards.
Now, things are not the same. Following that chain of events, shipping corporations increased the size of their fleets. To handle shocks, they have additional ships.
Head of research at Freightos Judah Levine stated, “The market is overcapacity, which happens to be a good thing.” Enough capacity ought to exist to handle this interruption.”
The world’s demand has also decreased, in part because China’s once-dominant economy is faltering and in part because interest rates have been hiked by the Federal Reserve of the United States and other central banks to fight inflation. Although it has decreased over the last 18 months, inflation is still greater than what central banks would prefer.
As a White House economic consultant during the Obama administration, Russ stated, “There are really big forces bringing down inflation.” “It’s difficult to see how the disruption caused by the Red Sea would significantly muddy the inflation declines we’ve been witnessing, beyond a tenth of a percentage point here and there.”
Many businesses claim they haven’t yet noticed a significant difference. For example, retailer Target stated that it is “confident in our ability to get guests the products they want and need” and that the majority of its products are not going through the Suez Canal.
Stellantis’ CEO, Carlos Tavares, stated: “So far, it’s OK.” Everything is going smoothly.”
The break might not last long. Flexport CEO Petersen cautioned that “it’s an extremely big deal” if shippers skip the Canal of Suez for a year. The increased expenses would result in “1 to 2% goods inflation.”
U.N. shipping specialist Jan Hoffmann issued a warning on Thursday, stating that delays in Red Sea shipping could jeopardize global food security by delaying grain supply to countries of Africa and Asia that rely on wheat from Europe and the Black Sea region.
Further aggravating would be a broader Middle East conflict leading to higher oil prices—which are currently lower than they were on October 7, the day after Hamas attacked Israel.
For the time being, businesses are getting by.
The Free People division of retailer Urban Outfitters purchases apparel from India and ships “a lot of that through the air,” co-president Frank Conforti stated last month at an investors’ conference. However, packing furniture and other home items on airplanes is extremely expensive.
Conforti concluded that, at the very least, wasting 15 days “sailing down the tip of Africa isn’t the end of the world” because household products aren’t as “fashion-sensitive” as apparel.