Brace for Impact: How the Red Sea crisis threatens global trade and supply chains

By Amr Fawzy

Introduction

The Red Sea, a critical artery for global trade, has recently been plagued by disruptions that have sent shockwaves through global supply chains (Yerushalmy, 2023). The stranding of the Ever Given container ship in March 2021 and the escalating threats from the Yemen conflict, as Figure (1) illustrates, have created significant challenges for industries relying on this vital route (Martin, 2021).

Background on Importance of Red Sea Route

The Red Sea and the Suez Canal corridors, as Figure (2) demonstrates, are pivotal to global trade, with an estimated 10-15% of all trade passing through these routes (Partington, 2024).

They serve as a key link between Asia and Europe, facilitating the movement of billions of dollars of goods and supplies. Alternative routes, such as the Cape of Good Hope, can add weeks of transit time for cargoes (Partington, 2024).

Recent Disruptions and Supply Chain Impacts

In March 2021, the Ever Given container ship ran aground in the Suez Canal, blocking traffic for six days and stalling over 300 ships. This incident resulted in hundreds of millions in economic losses per day (Martin, 2021). The blockage of the Suez Canal, a critical global trade route, highlighted the vulnerability of global supply chains to disruptions at key choke points (RTé, 2024).

In light of the Houthi attacks on commercial vessels, the Suez Canal has seen a significant drop in vessel traffic. The daily average has plummeted by 68%, from 15 to just 4.8 vessels (Project44, 2024).

The disruptions have also led to considerable delays in vessel schedules on Red Sea routes, with an increase of up to 310% in late arrivals. The transit time for containers has been affected as well, with certain routes experiencing an 8.8% increase. As rerouted containers reach their destinations, further impacts on transit time are expected (Project44, 2024).

In response to the situation, 264 vessels have been rerouted, leaving only 5 vessels in a state of drift. The number of drifting vessels has seen a 70% reduction as shipping carriers opt to reroute their vessels (Project44, 2024).

Vessels Re-routing

Moreover, the ongoing conflicts in Yemen have periodically restricted shipping in the Red Sea (Wintour, 2024). Houthi rebels have escalated attacks on commercial shipping vessels since mid-November 2023. As showed in Figure (3), in response to these risks, shipping companies have opted for longer detours via the Cape Route (Yerushalmy, 2023). The diversion of vessels away from the Red Sea has added one to two weeks of extra shipping time and around $1 million in cost to a journey between Asia and Europe (RTé, 2024).

Raise of Shipping Rates

These disruptions have led to a significant increase in the cost of shipments.?As Figure (4) shows, shipping costs have as much as tripled since commercial ships were attacked by Yemen’s Houthi rebels in the Red Sea in December (Stroh, 2024).?This has raised the prospect of a renewed inflation (Jordan, 2024).

Raise of the Prospect for a New Global Inflation

Dr El-Erian, president of Queens' College, Cambridge and chief economic adviser at financial services giant Allianz, told the BBC's Today programme: "Relative to what would have happened otherwise, we will see higher inflation, higher mortgage rates and lower growth. In absolute terms, however, it is nothing compared to what we had in 2021 and 2022. This shock is not going to be as big but it is unfortunate." (Jordan, 2024).

Raise of Insurance Premiums

According to Bloomberg, insurance premiums for vessels have also risen.?Underwriters have recently increased their rates for coverage of ships navigating through the region. The new rates range from 0.75% to 1% of the ship's value, marking a significant increase from just a few weeks ago when the rates were about one-tenth of the current amount. This surge in insurance premiums coincides with the recent airstrikes by the US and UK on the Houthi rebels in Yemen. The steep rise in costs poses a risk of making the journey prohibitively expensive (Longley, 2024).

Increase of the Vessels’ Transit Time

The journey time for vessels between Asia and Europe has increased as well. Ships traveling from the Far East to Europe now need to make a detour around the entire African continent via South Africa’s Cape of Good Hope.?This detour adds about 3,500 nautical miles (6,482 kilometers) to the journey, increasing the journey time by about 25-35% (Martin, 2023).

The Rise of Operational Costs

Fuel costs for every round trip for these vessels have also increased.?The diversion of container ships from the Suez Canal around the Cape of Good Hope in South Africa is having a “global contagion” effect on freight rates, leading to increased transit times and fuel costs (Forto, 2023).

Resilience of Supply Chains Despite these disruptions, some experts believe that the ocean-going supply chain, particularly in countries like China, is resilient enough to cope with the situation (Globaltimes, 2024). However, the simultaneous crises in two of the world’s major shipping canals have caused delays, raised costs, and disrupted supply chains, affecting logistics growth in countries like Singapore (Wong, 2024).

Impacts on Manufacturing, Retail, and Other Industries

These disruptions have had far-reaching impacts across various industries. For instance, Tesla had to suspend most car-producing operations at its factory near Berlin, Germany due to supply chain disruptions related to the Red Sea (SupplyChainBrain, 2024).

The fashion industry also faced increased shipping costs and rising sourcing and raw material costs (Safaya, 2023). Retailers have been hit hard, with product delays and higher costs as inventory runs out (Monteros, 2024).

Food Insecurity Concerns

The Red Sea route is indeed critical for food transport, including major wheat and grain shipments from Ukraine/Russia (Igd, 2024). Disruptions risk deepening ongoing global food security issues (The New Humanitarian, 2024). UN estimates show over 200,000 metric tons of food is shipped monthly through this corridor (Igd, 2024). Stockpiles are also affected, which could lead to shortages and increased prices (Igd, 2024).

Energy Market Volatility

Over 6% of the global oil supply moves through the Red Sea chokepoint (Mason, 2024). Attacks and shutdowns can create severe energy price spikes (Helm et al., 2024). Some analysis shows 2023 disruptions added ~$5/barrel to crude prices before steadying (Mason, 2024). Ongoing instability keeps markets jittery, affecting energy prices and potentially leading to increased costs for consumers (Beard et al., 2024).

Trade Finance Issues

Importers face growing costs/delays in securing letters of credit from banks. Volatility and war risk drive up financing expenses and insurance costs for cargoes. This has a particularly pronounced impact on developing economies reliant on shipping. The increased costs and risks associated with trade finance could lead to higher prices for goods and services, affecting businesses and consumers alike (The Conversation, 2024).

Longer-Term Outlook and Risk Mitigation

Efforts are underway to avoid future blockages along these routes. Shipping companies are building redundancies into their logistics networks and utilizing supply chain visibility tools to identify delays quicker. However, the situation remains tense, and the industry is on high alert for potential future disruptions (Ukpandi, 2020).

Conclusion

The recent incidents disrupting navigation and trade through the vital Red Sea corridor provide a reminder of the fragility underlying today's global supply chains. As the stranding of the Ever Given and the military threats emerging out of Yemen demonstrated, even temporary bottlenecks at strategic chokepoints can rapidly fall into billions in economic damages.

The sheer scale of the fallout reflects the lack of slack and flexibility built into global logistics flows today. The drive towards efficiency has streamlined supply and demand to such finely tuned levels that even small disruptions now incur massive impacts. Shipping carriers have limited ability to absorb delays or re-route vessels without incurring major delays and expenses. Manufacturers and retailers maintain such lean inventories that shortages rapidly echo.

?

As companies survey the higher insurance, shipping, and inventory costs stemming from the present Red Sea uncertainties, Problems Solved believes supply chain resilience will become an even more pressing priority. Businesses must reevaluate their core logistics strategies and trade-offs between cost, risk, and delivery reliability. Additional investments in supply chain visibility, redundancy, and scenario modeling appear essential given the increasing climate and geopolitical disruptions anticipated across all regions.

By reflecting upon the supply chain lessons surfaced by the Red Sea shipping crisis, companies can work collectively with governments to rebuild logistics networks that are both efficient and resilient in the face of growing uncertainty.

Facing your own supply chain disruptions? Problems Solved can help build resilience. Contact us to strengthen your logistics strategy.

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