With 30 per cent of global container trade going through the Suez Canal, the Red Sea shipping crisis is having a significant impact on supply chains globally. According to research from JP Morgan, this has also increased shipping costs, with routes from Asia to Europe becoming almost five times more expensive. The firm estimates that the disruptions could add 0.7 percentage points to global core goods inflation, and 0.3 per cent percentage points to overall core inflation, during the first
first half of 2024. However, as senior economist at JP Morgan Nora Szentivanyi pointed out, since the onset of the pandemic, there has been an excess supply of container ships globally, and once the disruptions are over, shipping rates could come down fairly quickly. Similarly, the CEO of Danish shipping giant Maersk, Vincent Clerc, said in the company’s annual report recently that while the current market has robust volumes, the Red Sea crisis has caused immediate capacity constraints and a temporary increase in rates, which will eventually lead to an oversupply in shipping capacity and lead to price pressure. Clerc said the ongoing disruptions and market volatility emphasise the need for supply chain resilience, and reiterated that the firm’s path towards integrated logistics is the right choice for customers to effectively manage these challenges. The ramifications of the Red Sea shipping crisis have been felt far and wide, with air freight rates rising in the run-up to Asia’s Lunar New Year, while US and UK ship investors have also been hit by rising Red Sea insurance costs. According to Reuters, war underwriters have raised the premiums they charge to US, British and Israeli firms by as much as 50 per cent for ships going through the Red Sea, while some providers are abandoning such businesses altogether due to the Houthi rebel attacks. A nuanced perspective As Mal Siriwardhane, CEO of B Dynamic Logistics, sees it, the recent militant attacks in the Red Sea pose significant challenges for global trade routes, which can particularly affect the Asia-Pacific (Apac) region, a hub of manufacturing and trade. “These disruptions can lead to longer transit times, with over 10 additional days and increased costs. Companies in the Apac region may need to reroute shipments, leading to capacity strains in alternative routes and ports,” he told Inside Retail. He went on to say that this will also have an impact on local operations as retailers will tend to store more products to deal with extra lead times. “As a short-term measure, the Apac logistics industry will need to enhance its risk management strategies and possibly invest more in real-time tracking and alternative transportation methods to mitigate these challenges,” he added. Some companies, such as US-based BDI Furniture, have said they are relying more on factories in places such as Turkey and Vietnam to mitigate the impact of the disruptions, adding to recent moves by Western countries to reduce dependence on China amid geopolitical tensions. Siriwardhane said that this company’s approach to front-loading orders and exploring alternative routes is a pragmatic response to disruptions. “Such strategies could set a precedent in the Apac region, prompting other companies to adopt similar measures. This shift may increase demand for early booking of cargo space, leading to capacity issues and potential rate hikes,” he noted. Furthermore, he believes that as more companies explore alternative routes, there could be a shift in trade flow patterns, necessitating investments in infrastructure and capabilities in these new routes. Decoupling and diversifying As companies try to decouple themselves from China’s supply chains, the strategy does come with its challenges. According to Siriwardhane, companies must consider the differences in infrastructure, labour skills and regulatory environments. “Additionally, the cost and quality of production can vary significantly. Establishing new supplier relationships and ensuring supply chain resilience in these new locations are other key considerations,” he pointed out. He thinks company representatives would need to visit these locations and have face-to-face engagements, as understanding the local culture and building effective partnerships with clearly articulated commercial contracts will be the key to success. “The increased interest in exploring non-traditional trade routes, like the California route, is likely among Apac companies. Factors to consider include the reliability and capacity of these routes, potential cost implications, and transit times. Companies should also evaluate geopolitical risks and the stability of the supply chain in these new routes,” he opined. Ultimately, Siriwardhane thinks that companies in the Apac region should focus on diversifying their supplier base and invest in supply chain visibility tools for better risk management. “Building strong relationships with logistics providers, leveraging technology for real-time data, and adopting flexible logistics solutions can enhance resilience. Additionally, incorporating sustainability and ethical practices in the supply chain can not only mitigate risks but also align with global standards and consumer expectations,” he concluded.