Tempest in a teapot

Empty shelves, shortages of toys and decorative items, and severe price increases? If you’ve been reading the news and analysis, these are the consequences you can expect from the conflict taking place in the Red Sea.

But there is an alternative point of view. Ralf Duester of supply chain software provider Setlog says these predictions are nothing more than fearmongering.

“Consumers will hardly feel any effects for fast-moving consumer goods imported from Asia at the moment,” said Duester, board member of Germany-based Setlog.

His opinion is based not only on discussions with importers and freight forwarders, but also on an analysis of 50 brands from the fast-moving consumer goods sector conducted by his company. According to this analysis, imports of decorations, clothing and other goods from the Far East are being delayed by an average of 3.5 to seven days due to the situation in the Middle East.

For the sample, the experts compared data from the beginning of the attacks on Red Sea shipping by Yemeni rebel Houthis in November 2023 to January 17, 2024, with figures from the same period a year ago. They analyzed in detail the transport time between Asia and the western ports – from the departure of the ships at the port to the arrival of the goods at the central warehouse.

The delays in delivery are happening because most of the major liner carriers – Maersk, Hapag-Lloyd and so on – are diverting their ships away from the Red Sea and Suez Canal, the preferred shortcut from Asia to Europe. The detour takes them instead around the Cape of Good Hope at the southern tip of Africa, and then up the west side of the continent through the Atlantic Ocean towards Europe. Depending on the speed of the ships, this journey takes between seven and 20 days longer than the trip through the 164-kilometre Suez Canal.

Options to mitigate delays

According to Duester, many importers are able to compensate for the lost time thanks to better planning, and using software to track containers and react quickly to changes in the schedules of freight forwarders and shipping companies. “Leading companies have digitized supply chain management, work with SCM software, tracking tools, contingency plans, flexibility agreements and collaborate closely with all partners,” he said.

Importers are currently looking more closely at shipping companies, the loops at the western ports and time savings on the onward journey by switching modes of transport to shorten the longer transit time from the Far East to Europe. Many have also reconsidered which suppliers they will work with.

In this context, Duester warned against scaremongering. He referred to statements made by large companies regarding failures or delivery delays in retail. Discount retailer Aldi Nord, for example, emphasized on its website that it is working closely with suppliers and logistics partners to find solutions. “Thanks to this work in the background, the situation in the Red Sea is not expected to have any noticeable impact on our customers,” it said.

The situation is different for the automotive industry. Volvo reported a few days of production stoppage in Ghent, Belgium, due to supply bottlenecks for gearboxes. Tesla had to largely suspend its production near Berlin for almost two weeks starting January 29.

Even if consumers notice little of the attacks on ships by the Houthi rebels, the impact on cost for companies is significant. This is because around 10 percent of all global trade passes through the Suez Canal, with up to 19,000 ships passing through the Egyptian sea route every year.

According to an analysis by credit insurer Allianz Trade, the number of freighters passing through the Suez Canal has fallen by around 30 percent since the Houthi attacks began. At the same time, shipping traffic around the Cape of Good Hope has almost doubled.

Due to the crisis, prices for insurance premiums for transportation through the canal have skyrocketed. And the detour via the Cape of Good Hope results in up to 30 percent higher fuel costs for shipments. The consequences are annoying: according to Hapag-Lloyd, the situation on the Red Sea is causing additional costs in the high double-digit million range every month for the largest container shipping company in Germany.

Prices for container transportation from China quickly increased at the beginning of January. “For a 40-foot (high cube) container from China to Europe, importers paid an average of US$1,500 on the spot market in the first week and more than $5,000 in the second week,” reported Patrick Merkel, managing director of Prologue Solutions in Hamburg.

Chinese New Year, which began on February 10, also contributes to rising shipping rates. “Every year, companies try to get seasonal goods out of China for spring and summer before Chinese New Year,” Duester said. “The demand for containers and capacity for the routes to Europe and the USA has increased due to this short peak season, but it is below the previous year’s level. Shippers are therefore accepting higher costs in the short term, as the outflow of goods from the production facilities has top priority.”

Demand for containers in China has skyrocketed, with container manufacturers taking orders for more than 750,000 units since the Red Sea disruption began.

Seth Frederickson, vice-president of product management at FourKites, said Chinese New Year could have longer, lingering impacts in this context.

“If these reroutes and delays exist for another few weeks, retailers that rely on Chinese supplied products will have further delays due to the Chinese New Year. Retailers planning for Spring sales events typically want their good shipped before annual delays caused by the Chinese New Year. If the Red Sea disruption lasts another two to three weeks, I expect to see product shortages on shelves in April and May, except for those higher end retailers that have the margins to support shifting to air freight so as to not miss on the revenue side,” Frederickson said.

The crisis on the Suez Canal came at an inopportune time for importers. To keep rates stable liner companies had begun to cancel connections on many routes or not call at individual ports (blank sailings) on a large scale due to lower demand. “Around 25 percent of total capacity was taken out of the market from December,” explained Merkel. The situation in the Red Sea then suddenly increased pressure on the reduced capacities, leading to a massive price increase and a considerable capacity crunch.

“However, the wave should have passed by March, although some follow-up problems are expected due to a shortage of empty containers because distribution is currently no longer working. We expect demand to ease and freight costs to fall as a result in March,” Merkel added.