Suppliers for major retailers such as IKEA, Home Depot, and Amazon are grappling with significant shipping challenges, marking the most significant upheaval since the disruptions caused by the COVID-19 pandemic in global supply chains. According to sources in the logistics industry, companies are adjusting their shipping strategies.
Basic Fun, a Florida-based company, traditionally ships its toys from China to Europe via the Suez Canal, a route used by about one-third of global container ship cargo. However, due to drone and missile attacks by Yemeni Houthis in the Red Sea, expressing support for the Palestinian group Hamas in Gaza, Basic Fun has had to alter its plans. The Suez Canal route is now disrupted, and the company is redirecting its shipments around the southern tip of Africa, which is expected to incur an additional cost of up to $1 million in fuel for each round trip between Asia and Northern Europe. Despite the challenges, Basic Fun is working through the holidays to ensure the timely delivery of toys to ports in the U.K. and Rotterdam using the longer route.
Panama Canal
Basic Fun is also adjusting its shipping routes for goods destined for ports on the U.S. East Coast. Instead of using the Suez Canal, some shipments are being rerouted through the Panama Canal, which is currently facing drought conditions. Alternatively, other goods are being redirected to the U.S. West Coast via the more direct route across the Pacific Ocean.
Jay Foreman, CEO of Basic Fun, acknowledged that these changes will result in longer transit times and increased costs. He mentioned that freight rates for certain China-to-U.K. shipments have more than doubled to approximately $4,400 per container since the start of the Israel-Hamas conflict in October.
The situation in the Suez Canal is dynamic, with major shipping companies like Maersk and CMA CGM working to resume voyages through the Red Sea with military escorts. The impact of these disruptions is expected to be most pronounced in the next six weeks. Michael Aldwell, Executive Vice President of Sea Logistics for Kuehne+ Nagel, emphasized the challenges of rapidly reorganizing global shipping, foreseeing potential shortages of vessel space, misplacement of empty containers needed for China exports, and a significant short-term increase in transport prices.
As of Wednesday, Kuehne + Nagel reported that nearly 20% of the global container fleet, comprising 364 large container vessels capable of carrying just over 2.5 million full-sized containers, had changed course due to the Red Sea attacks.
Rationing space
Vessel owners have initiated the rationing of the more affordable, contract-rate space reserved for customers, according to Anders Schulze, head of the ocean business at digital freight forwarder Flexport. Under this approach, a customer committed to delivering ten containers per month under their contract might only receive five containers at contract rates, with the remaining five subjected to costly spot market rates.
This development has triggered a frenzied rush to secure shipping space before the early February deadline, particularly to move goods out of China before the factories close for the extended Lunar New Year celebrations. The heightened uncertainty has led to a need for reconfirmation of every booking out of China, with potential changes in dates and routing, as noted by Alan Baer, CEO of OL USA, a freight shipments handler.
OL USA, involved in securing spots on ships through contracts with ship owners, exemplifies the urgency in securing space, with smaller shippers facing the risk of being displaced. This dynamic has affected businesses like Marco Castelli’s import/export operation in Shanghai, struggling to rebook three containers of Chinese-made machinery components bound for Italy after cancellations due to the ongoing crisis.
Jay Foreman, CEO of Basic Fun, emphasized that their contracts with customers do not provide a mechanism to recover the additional expenses incurred. With plans to have around 40 containers on the water before the Lunar New Year, he highlighted the fixed prices in contracts and suggested that most suppliers will have to absorb these unforeseen costs. The redirection of ships around the southern tip of Africa is expected to incur an extra cost of up to $1 million in fuel for every round trip between Asia and Northern Europe.
