Red Sea Conflict Shows the Fragility of Shipping Routes

Key takeaways and figures:

• Kuehne+Nagel: More than 350 shipping containers have changed course, taking the long route around Africa to avoid violence in the Red Sea.
• S&P Global: Around 12% of global trade passes through the Suez Canal, representing 30% of all global container traffic and over $1 trillion worth of goods.
• CNBC: As a result of the Red Sea Conflict, U.S. shippers have seen ocean freight rates from the Far East to the U.S. increase in a general range of 146% (East Coast) to 186% (West Coast).
• U.S. News & World Report: A severe drought that began last year has forced authorities to slash ship crossings by 36% in the Panama Canal, potentially costing up to $700 million.
• JP Morgan: The rerouting of ships around Africa’s Cape of Good Hope equates to a roughly 30% increase in transit times.
• C.H. Robinson: New ocean vessel capacity began entering the market in Q4 2023 and will continue into 2024. Expected to be added mainly to the Asia trades, the new vessels should help to close the capacity vs. demand gap.

What would eventually come to be known as the Red Sea Crisis started on October 19th, 2023, as a result of Houthi rebel attacks on tankers and cargo ships, which caused over 350 vessels to detour (Kuehne+Nagel) around the Suez Canal.

According to S&P Global, around 12% of global trade passes through the Suez Canal, representing 30% of all global container traffic and over $1 trillion worth of goods. 

Forced to reroute, vessels are going around southern Africa, a detour that adds 4,000 miles to the journey.

The obvious impacts are increased transport times and freight costs. But what’s the blowout, and how is it affecting electronics?

The Story So Far

At the end of November 2023, a militant group that controls roughly half of Yemen and goes by the name Houthis started targeting container ships that they believed to be linked to Israel. The ships were transiting through the Red Sea to reach the Suez Canal—a crucial trade route between Europe and Asia. 

Allied with Iran, the group has targeted the ships with drones and missiles and has gone as far as dropping men from helicopters onto one of its targets.

Jump to 2024, and the Red Sea Crisis has yet to abate, the material impacts continuing to ripple through global trade.

The rebels claim the attacks are in response to the ongoing war between Israel and Hamas in Gaza, and targets are Israel-linked, but many of the vessels hit are reported to have had little to no link to Israel.

Compounding matters are the conditions in the Panama Canal as the region experiences one of the worst droughts in recorded history. Below-average water levels have forced canal authorities to decrease the amount of traffic navigating the canal each day by more than 36%, potentially costing up to $700 million.

According to UNCTAD, United Nations Conference on Trade and Development, since December, a drop of 39% in the number of ships transiting the Suez Canal has resulted in a 45% decrease in freight tonnage.

Shipping times

“The lengthening of supplier delivery times acts as an adverse supply shock. The rerouting of ships around Africa’s Cape of Good Hope equates to a roughly 30% increase in transit times, and this implies an approximately 9% reduction in effective global container shipping capacity,” said Nora Szentivanyi, a Senior Economist at J.P. Morgan.

The heaviest delays are being seen in shipments from Asian ports toward Western Europe and the East Coast of the U.S. Routes from Asia to Germany are especially affected, experiencing an incredible 55% increase in transit times and resulting in an average delay of 12 days.

Shipments bound for New York and other East Coast ports are also battling delays of up to 11 days. 

Shipping Rates

As a result of the conflict, U.S. shippers have seen ocean freight rates from the Far East to the U.S. increase in a general range of 146% (East Coast) to 186% (West Coast), states CNBC.

However, C.H. Robinson reports that although the current situations in the Suez Canal and Panama Canal are impacting availability, low North American demand prevents a significant increase in overall ocean container prices. 

“After an initial surge in spot pricing and additional surcharges based on original uncertainty with the Red Sea and Panama Canal crossings, ocean rates are showing signs of steadying and, in some lanes, slowly decreasing. Ocean carriers are increasing the chartering of vessels to help supplement the number of vessels needed to support the diversions.”

What it Means for Electronics

The gravity of the situation on supply chains hit home for many when Tesla announced it was shutting down its factory outside Berlin for two weeks between January 29th and February 11th, delaying the production of 5,000─7,000 vehicles.

Typically, everything from toys to natural gas and electronics travels through the Red Sea toward the Suez Canal. However, while low-cost devices, bulk parts, and raw materials travel by sea, expensive, high-end electronic products and components travel by air.

Raw materials from Asia and Eastern Africa used to manufacture batteries in Europe, for example, would need to find alternative routes or modes of transport, increasing shipping costs and delivery times.

The same holds true for high-volume, low-cost consumer devices that would typically travel by sea and from Asia to Europe through the Red Sea.

Lengthy transit delays can have a domino effect. Organizations heavily reliant on just-in-time inventory strategies will have to carefully monitor their supply chains and mitigate disruptions to their production and shipping schedules.

C.H. Robinson recommends creating contingency plans to ensure you have enough product on hand to allow for the additional transit time for ocean shipments and consider whether temporarily switching to air for critical shipments is necessary.

The company claims that although there’s been some shifting from ocean freight to air, pricing has not increased significantly for air freight, making it a viable option for time-sensitive shipments.

Although shipment delays will cause disruption for retailers, distributors, and manufacturers in the U.S. and worldwide, the financial impacts will be mostly felt on bulky, low-value goods where the cost of shipping represents a significant portion of the total cost of goods.

Dual-sourcing, onshoring, and nearshoring, using geo-diverse suppliers, and optimizing inventory allocation are further risk-management strategies that can help you mitigate risk and power through uncertainties.

Much like the onslaught of pandemic-related supply chain disruptions, the crisis has shown the fragility of our shipping routes and our supply chains. 

However, it’s important to note that although there are delays to contend with and some capacity restrictions, ports aren’t experiencing congestion issues, and this isn’t a do-over of post-pandemic proportions.

Luckily, new ocean vessel capacity began entering the market in Q4 2023 and will continue into 2024. Expected to be added mainly to the Asia trades, the new vessels should help to close the capacity vs. demand gap.