By Jaguar Freight
The global shipping sector has had it rough for the past several years. In February 2022, the Russian invasion of Ukraine amplified a supply chain disruption dating back to the COVID-19 pandemic, and that conflict is persisting to this day, with no end in sight for the stalemate. The war in Gaza that erupted in October 2023 is boiling over the perennially sensitive situation in the Middle East, leading into a crisis in the Red Sea, with the Houthi militant group attacking ships passing through the vital Bab el-Mandeb Strait.
At least four of the world’s largest shipping firms have said that they would suspend shipping operations through the Red Sea and Suez Canal amid fears of being attacked. The US responded by establishing a multinational coalition to counter the Houthi threat, named Operation Prosperity Guardian.
Simon Kaye, CEO of New York-based Freight Architect™ and NVOCC, Jaguar Freight, says the Red Sea crisis has three direct impacts on shipping.
The first direct impact is the disruption of shipping schedules. As demonstrated by the 2021 Ever Given incident, disrupting passage through the Red Sea and Suez Canal has a massive impact on global trade. This means that most cargo ships heading from Asia to Europe and vice versa will have to go the long way around Africa, adding up to two and a half weeks to the journey. According to Kaye, these extended transit times are also going to take more vessels out of their regular rotation, so shippers need to update their plans, taking into consideration the disruption in the schedules and the extended transit times.
Second is increased costs. The risk of getting attacked will cause war insurance surcharges to go up, which will undoubtedly be passed on by the shipping lines to shippers. The Red Sea and Suez is a major oil shipping route, which inevitably will result in the price of fuel rising. This has a knock-on effect on virtually all commodities, including food and consumer goods, which rely on oil products for every leg of the transportation supply chain.
Third is increased carbon emissions, contributing to further environmental degradation. As ships need to go around Africa rather than straight through the Suez Canal, they burn more fuel. According to Kaye, this comes ironically right after COP28, where nations pushed for the elimination of fossil fuels and a reduction in carbon emissions.
“All of these cascade to more expensive freight rates, longer transit times, and, ultimately, higher prices at the stores and the pumps, affecting consumers’ budgets,” Kaye says. “These are the things that shippers really need to take into consideration with planning, and they need to look further out in the face of disruption.”
In response to this crisis, Kaye advises shippers to extend their planning tables. If their plans are 30, 60, and 90 days out, it would be best to extend it to at least 120 days, or even longer, as goods will inevitably take longer to ship. He says that they also may want to consider alternative modes of transport, such as air freight, where viable. Air rates have been relatively soft, although they have been increasing recently due to capacity demands.
As early as now, businesses should collect a clear snapshot of all westbound Asia freight currently on the water, and proactively communicate the impacted orders and SKUs to their various stakeholders. They should also assess what products are scheduled to sail between now and the Lunar New Year (February 10), and form a team to decide quickly which ones need to be prioritized, moved via air, or rerouted.
Kaye also emphasizes the need for communication. Businesses should keep their finance team well-informed. While the exact impacts aren’t clear yet, the finance team should prepare for additional costs. Businesses should also consider sending daily updates to all stakeholders, with a summary of the latest news and its impact. Having a coordinated single message for the company will save the effort of having to type and respond to numerous requests for updates.
“These things never happen at a good time,” Kaye says. “There’s no good timing for a global shipping crisis. No one ever wants this, but this is the sort of thing that I refer to as the ‘X factor’ in planning. The X factor is what we don’t know. This is why companies need to be nimble and flexible in the way that they manage their businesses. They need to have the ability to adapt and change because there will always be something that isn’t on the horizon and will disrupt their business.”
