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Red Sea attacks already bigger issue for supply chain than pandemic, maritime advisory warns

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Containers are piled up in Lisbon, Portugal, on January 13, 2024. Recent U.S. and UK air strikes on Yemen are causing global shipping rates to spike, sparking fears of extended disruptions in the Red Sea, a crucial trade route. The strikes are a response to attacks on the Red Sea, adding complexity to the regional conflict originating from Israel’s Gaza war. (Photo by Luis Boza/NurPhoto via Getty Images)
Nurphoto | Nurphoto | Getty Images

A leading ocean supply chain advisory firm is warning that the disruptions to shipping from the Houthi rebel attacks in the Red Sea are already more damaging to the supply chain impact than the early Covid-19 pandemic.

Sea-Intelligence analyzed current vessel delays compared to delays over the last several years in a report for clients. The data shows that the longer transit around the Cape of Good Hope as ships divert from the Red Sea is already having a more significant impact on vessels available to pick up containers at ports than during the pandemic. This supply chain measure is known in the industry as “vessel capacity.”

The vessel capacity drop is the second largest in recent years, according to Alan Murphy, CEO of Sea-Intelligence. The only single event with a bigger impact than the Red Sea crisis was the “Ever Given,” the giant cargo ship which got stuck in the Suez Canal for six days during March 2021. Billions in trade were at a standstill during that event. With that exception, “This [the Red Sea crisis] is the largest single event – even larger than the early pandemic impact,” Murphy said.

Sea-Intelligence marked two phases of the pandemic. The first phase impacted Chinese ports due to Covic-19 travel, trucking and manufacturing restrictions, and the second phase incorporated the global spread of the pandemic.

A key difference between the pandemic period and now is vessel capacity that could be brought back online. Traditionally, during the period of the year that includes February’s Chinese New Year, vessel capacity declines due to a decrease in container demand. That’s because ocean carriers bring in containers early, starting the previous October, ahead of the manufacturing plants closing in honor of the holidays.

Murphy said the maritime industry today has new vessels available for work, whereas during the pandemic, all vessels were being used and demand was at historic highs. During the worst of the Covid supply chain snafus, there was not enough vessel space to accommodate containers which snowballed into a massive container slowdown.

Sea-Intelligence, along with other maritime officials, estimate there is approximately 10% of the world’s fleet currently not in service. If additional vessels were deployed, it could correct the imbalance in vessel availability and increase certainty in vessel schedules.

“To go around the Cape of Good Hope, ocean carriers need one or two additional vessels to offset the delays,” Murphy said. “Ocean carriers are going to need to add vessels.”

He anticipates ocean carriers adding vessels into their rotation after the Chinese New Year. “It’s in everybody’s interest to have a Suez solution,” Murphy said.

Supply chain capacity had been in excess after the Covid boom waned and the freight industry had entered a significant recession, with potential for the Red Sea to reverse that. The amount of vessels added to pick up the slack depends on demand. MSC, the world’s largest ocean carrier, recently announced it was canceling vessels as a result of a decrease in demand for Chinese goods.

The delays in the arrival of containers are impacting some companies’ supply chains. Tesla, Volvo, and Michelin have recently said they have had to halt manufacturing. Ikea has warned of delays of product, as well as British retailer Next and Crocs.

“Threats to Red Sea shipping are a threat to maritime commerce worldwide,” said Steve Lamar, CEO of the American Apparel and Footwear Association. “Delays and cost increases are mounting. Although companies are exploring alternative shipping options, adverse knock-on effects continuing to disrupt logistics globally. More needs to be done to ensure the safety of crews and security of cargo by eliminating existing or future threats entirely.”

Adding vessels to the flow of trade could help with a potential container crunch that has many logistics managers worried. When vessels are late, the containers on those vessels will be late to be processed and reused again for exports. This will delay exports from Europe to the United States as well as from Asia to the United States and the world. Logistics CEOs have been warning CNBC that the vessel re-routings would result in container crunches for weeks.

The diversions away from the Red Sea are also beginning to have a bigger impact on energy markets and product tanker operators. Bendik Folden Nyttingnes, a shipping analyst at Clarksons Securities, recently told CNBC the longer transit times around the Cape of Good Hope could create a supply shortage of tankers.

Shell this week confirmed it was suspending shipments through the Red Sea, a move BP had already made.

According to data from supply chain intelligence firm Kpler, there have been 25 LNG vessel diversions from Red Sea to Cape of Good Hope since December 15, with 11 of these diversions taking place since Jan 15. This includes at least four vessels heading from Qatar to Europe. There are currently no LNG vessels within the Red Sea.NYK

K Line, Mitsui O.S.K. Lines, Reliance, ADNOC, TormHafnia, Stena Bulk, HafniaBPFrontlineEquinor, and Euronav are reportedly among the tanker operators and energy companies choosing to avoid the area following recent warnings. Companies including Tom, Hafnia, Scorpio Tankers, and Ardmore would benefit if product tanker rates rose, according to Nyttingnes.

“We are finally starting to see an impact in product tanker rates after a period of decline in transits through the Red Sea,” he said. “Several routes out of the Middle East Gulf are showing double-digit gains today.”

He added that the company is now seeing vessels that were once waiting outside of the Gulf of Aden to start sailing South.

“It is likely that these (vessels) have been waiting for a suitable time to transit the Red Sea and the fact that they are now turning away could be a sign that some market participants are losing faith in a quick solution to the Houthi attacks,” he said.

Honour Lane Shipping estimated this week that despite U.S. counterattacks against the Houthis, the rebel groups attacks in the Red Sea could last from six months to a year.

The Houthis have continued with attacks on international shipping, targeting U.S.-owned bulk vessels in recent days. A Greece-based bulk vessel was also attacked this week.

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