Global supply chains are quite fragile and rigid. Whether from climate change, war or human error, there is not always an easy solution when a problem occurs. The general public is unaware how goods end up on store shelves. They don’t realize how one or two incidents half a world away can disrupt supply chains. There are choke points where a delay can cause ripples throughout the entire supply chain.
The Suez Canal is a vital maritime link connecting the Mediterranean Sea to the Red Sea.
A tremendous amount of goods ship between Europe and Asia. Approximately 19,000 ships transit through the Suez Canal each year and that represents 12% of world trade. The industry learned how fragile the supply chain was in March 2021, when the Suez Canal was blocked for six days by Ever Given. The repercussions were felt for months afterwards with shipment delays extended for weeks past their first delivery dates.
However, that area is back in the news but this time it is due to armed conflict. In support of the Palestinians, the Iranian-backed Houthi rebels started attacking maritime ships in response to the Israeli-Gaza conflict. The major ocean carriers temporarily halted shipments through the Canal and started routing ships around the Cape of Good Hope. About 16 ships of various types were attached in less than a month. As a result, Maersk, MSC, CMA-CGM, Hapag Lloyd, Evergreen, COSCO, OOCL, Wan Hai, and oil giant BP are among the carriers that have suspended service.
The problem is worsened by the issues with the Panama Canal.
Low water levels due to drought have resulted in the channel that connects the Pacific and Atlantic oceans to be running at only 55 percent normal capacity. The canal normally carries five percent of ocean trade and some of that traffic was being diverted through the Suez Canal to avoid the backlogs and delays. The Suez Canal was experiencing a comeback from the dark days of the Ever Given. More traffic was moving through the Suez Canal as it has been unaffected by climate change.
So far, more than 100 container ships have been rerouted to avoid the Suez Canal. Carriers are announcing new surcharges (such as War Risk, Emergency Bunker and Peak Season Surcharges) to cover additional operating expenses. Routing around Africa can extend transit times 10-14 days, increasing a carrier’s fuel and crew costs. Shanghai to Rotterdam via the Suez Canal is approximately 11,000 nautical miles, while transiting around the Cape of Good Hope is 13,500 nautical miles. Assuming an average vessel speed of 16 knots, that will add an additional 11-13 days to the transit time.
In addition, shipping costs had already started increasing.
While still low compared to the supply chain crisis during Covid, they are at the highest point for all of 2023. Shipping rates have increased 20 percent in recent days for cargo ships using the Suez Canal. A round trip from Shanghai to Rotterdam will cost nearly $1 million more in fuel by going around Africa. Also, maritime insurance companies are requiring additional premiums due to the rising costs of war risk insurance coverage. Also, ocean carriers may feel the need to invest in extra security measures, further increasing costs.
CMA-CGM has already alerted shippers to the fact that Clause 10 of the Bill of Lading gives the carrier the right to charge extra for alternate routings. They have uploaded an advisory for vessels that were supposed to go to ports in the Red Sea. You will pay an additional $1,575/20′ dry, $2,700/40′ dry, and $3,000 reefer for cargo destined for Red Sea ports.
Moreover, re-routing raises concerns about port congestion.
The sudden arrival of containers, following a period of low activity, can overwhelm port operations, causing delays and disruptions. To keep current service levels, carriers must deploy extra vessels, adding to the cost pressure. It will take more vessels to make the journey from Asia to Europe and maintain a weekly service.
The U.S. announced that they are forming a multinational task force to protect shipping through the Red Sea and the Suez Canal. The aim of the coalition is to protect seafarers and create safe passage for commercial vessels. The New York Times reported that U.S. Defense Secretary Lloyd Austin said the Houthi attacks threaten, “The free flow of commerce, endangers innocent mariners, and violate international Law.” In response, the Houthis have threatened to attack U.S. warships if the coalition attacks Houthi targets. Unfortunately, a military solution will take time to put together and once enacted, will slow down trade as commercial ships are brought together and shepherded through the area. Some type of diplomatic solution will be needed, or the situation could be drawn out indefinitely.
Going into 2024, there is an air of uncertainty in the marketplace.
In the near term, carriers will be coping with the traditional increase in cargo volumes that occur just before the Chinese New Year and shippers rush to get orders out before factories close for the holiday. While companies have continued to diversity their supply chains following the pandemic, the Suez and Panama Canals have few viable alternatives. They account for over half of the container shipping volume between Asia and North America. Authorities must invest in the security and climate adaptability of major trading chokepoints plus improve port infrastructure and look to find alternative transport routes.
