Belgian and German car factories have halted production. A renowned British department store faces delays in releasing its spring fashion lines. A Maryland-based hospital supply company remains uncertain about the arrival of parts from Asia.
Incidents of ship attacks in the Red Sea are further disrupting global trade, compounding the existing challenges posed by pandemic-related congestion at ports and Russia’s invasion of Ukraine.
The Houthi rebels in Yemen, aiming to halt Israel’s offensive against Hamas in Gaza, have been targeting cargo ships traversing the routes between Asia, Europe, and the U.S. This has compelled vessels to detour away from the Suez Canal, necessitating longer voyages around the southern tip of Africa. Consequently, these disruptions are causing significant delays and escalating transportation expenses. This situation exacerbates ongoing inflationary pressures, which persist as the global community grapples with their resurgence.
“Currently, we’re experiencing a brief period of disorder, which inevitably leads to escalated expenses,” stated Ryan Petersen, CEO of Flexport, a supply chain management company. “Each diverted ship carries roughly 10,000 containers, requiring extensive communication and planning to reroute their journeys.” Compounding the chaos in global shipping, according to Mr. Petersen, is a “double blow”: The Panama Canal faces restrictions due to low water levels caused by drought, while shippers are scrambling to transport goods before Chinese factories close for the Lunar New Year holiday from February 10-17.
Growing threat
The longer the conflict in Gaza persists, the greater the threat becomes. Extended disruptions to Red Sea trade could lead to a surge in goods inflation by as much as 2%, exacerbating existing challenges with rising prices for essentials like groceries and rent. This could also prompt an increase in interest rates, further straining economies already weakened by the ongoing turmoil.
In Greater Landover, Maryland, Man and Machine, a company specializing in washable keyboards and accessories for hospitals, faces ongoing setbacks. Founder and CEO Clifton Broumand typically receives shipments of components from Taiwan and China about once a month. However, the latest delivery, dispatched from Asia four weeks ago, has been delayed. Broumand acknowledges the frustration, but emphasizes that such disruptions are beyond their control and are communicated transparently to customers.
Similar challenges are being felt across industries. Tesla, the electric carmaker, is forced to halt production at its factory near Berlin due to shipment delays. Volvo, a Swedish car brand owned by a Chinese company, recently paused assembly lines in Belgium while awaiting crucial parts for transmissions. Suzuki Motor Corp. experienced a week-long production halt at its plant in Hungary due to delays in receiving engines and other essential components from Japan.
The ripple effects extend beyond automotive manufacturing. British retail giant Marks and Spencer has warned of delays in its new spring collections for clothing and home goods, originally slated for February and March. CEO Stuart Machin acknowledges the widespread impact of the Red Sea disruptions, emphasizing its significance to their operations.
The global implications of the crisis in maritime shipping are significant. Approximately 20% of clothes and shoes imported into the U.S. rely on the Suez Canal, while in Europe, the figures are even higher, with 40% of clothes and 50% of shoes passing through the Red Sea. Flexport reports that nearly a quarter of global shipping capacity is currently diverted from the Red Sea, adding considerable time and distance to maritime journeys.
Rising costs
The expense of shipping a standard 40-foot container from Asia to northern Europe has skyrocketed from just under $1,500 in mid-December to almost $5,500. Transporting Asian goods to the Mediterranean is even pricier, reaching nearly $6,800 from $2,400 in mid-December, as reported by the freight booking platform Freightos. However, the current situation, albeit challenging, is an improvement from the peak of supply chain disruptions two years ago. During that time, it cost $15,000 to ship a container from Asia to northern Europe and almost $14,200 to the Mediterranean. Katheryn Russ, an economist at the University of California, Davis, noted, “Compared to the disruptions during the pandemic, we are not experiencing as severe a situation.”
During 2021 and 2022, American consumers, eager to break free from COVID-19 lockdowns and supported by government relief checks, indulged in a shopping frenzy, purchasing furniture, sports equipment, and various other goods. This surge in orders overwhelmed factories, ports, and freight yards, resulting in delays, shortages, and increased prices.
The current landscape differs significantly. Following the supply chain disruptions, shipping companies have bolstered their fleets, expanding their number of ships to better manage unexpected shocks.
On Thursday, Jan Hoffmann, a shipping expert at the UN, cautioned about the implications of Red Sea shipping disruptions, highlighting the threat they pose to global food security. These snags could impede the distribution of grain to regions in Africa and Asia, which rely on wheat sourced from Europe and the Black Sea area.
It would be even worse if the conflict in West Asia widens and drives up oil prices, which are now lower than they were the day before Hamas attacked Israel on October 7.
For now, companies are muddling through.
