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January 12, 2024

The Red Sea Crisis Explainer

The Red Sea Crisis Explainer

What is the Strategic Importance of the Red Sea?

The Red Sea is a pivotal route for container shipping and international commerce – linking the Indian Ocean with the Mediterranean Sea via the Suez Canal. Nearly 15% of global shipping traffic transits this strategic waterway, establishing it as the fastest route between Europe and Asia.

According to Statista, in January 2023, 123.5 million metric tons of goods were transported via the Suez Canal in Egypt and over 22,000 ships passed through the canal in 2022. 12% of global trade by volume travels through this route, highlighting its significance in the world economy.

What Happened?

The Red Sea has recently experienced a surge in regional tensions leading to attacks on commercial vessels. These events are part of larger geopolitical conflicts affecting this vital trade route. The attacks are concentrated near the Bab al-Mandab Strait, causing significant rerouting of maritime traffic.

How has the Red Sea Disruption affected Shippers?

The Red Sea crisis has significantly disrupted shipping operations. Shipping companies like Maersk and others have faced threats to their vessels, leading to rerouting decisions and operational pauses.

 

According to analysts, the fleet capacity that moved through the Suez Canal fell more than 60% in the three-week period from December 18 to January 7, compared to the corresponding period last year. The number of TEUs (twenty-foot equivalent units) fell from 3.3 million to just short of 1.3 million as carriers increasingly opted for safe passage. The alternative route around the Cape of Good Hope, while safer, is longer and more costly, leading to increased fuel bills and higher insurance premiums.

According to Xeneta, ocean freight shipping rates between the Far East and North Europe have increased by 124% since the crisis escalated in mid-December 2023. Rates between the Far East and US East Coast have increased by 45% and rates into the Mediterranean have increased by 118%.

The scenario may deteriorate in the upcoming weeks as shipping companies hurry to dispatch orders from China before factories shut down for the Lunar New Year holiday.

How is the Red Sea Crisis Impacting Consumers?

The ripple effects of the Red Sea attacks are reaching consumers globally. The increased costs of shipping, driven by the need to reroute and the heightened insurance rates, are likely to translate into higher prices for various goods.

Brace yourself for potential delays in getting your favourite products at stores. The Red Sea issues are forcing container ships to travel the longer Cape of Good Hope route, adding around 10 days and 3,500 nautical miles to their voyage times.

Prominent global retailers like Ikea have cautioned about possible disruptions in the supply chain should shipping issues persist.

Shippers are exploring the possibility of using airfreight in a targeted manner to alleviate the mounting delays caused by the Red Sea crisis. Despite the disruption at sea, airfreight data has not yet shown any significant change in rates. However, this is expected to change soon, which could aggravate inflationary pressures.

What Should Shippers be doing?

During a black swan event such as the Covid-19 pandemic, shippers have accused carriers of profiteering on the back of a tragic situation, while carriers argue that shippers have not been willing to pay sustainable rate levels. The latest development in the shipping industry is that supply and demand rules, and it is a two-way street for better and for worse.

Shippers should develop a plan and speak with shipping lines and logistics providers. This will help them better understand the situation and ensure that they are taking the necessary steps to protect their supply chains.

Secure capacity with freight forwarders and carriers: Shippers should book space on ships and planes as soon as possible to ensure that their goods are transported on time. They should also work with freight forwarders and carriers to secure the necessary capacity for their shipments.

Ensure availability of equipment, including both boxes and space on board the ship: Shippers should ensure that they have enough containers and space on board the ship to transport their goods. They should also work with freight forwarders and carriers to ensure that the necessary equipment is available.

Increase the movement of goods to avoid higher floating inventories: Shippers should try to move their goods as quickly as possible to avoid having too much inventory on hand. This will help them avoid additional costs associated with storing their goods for longer periods of time.

Act quickly, especially with the traditional squeeze on capacity in the run-up to Chinese Lunar New Year: Shippers should act quickly to secure the necessary capacity for their shipments, especially with the traditional squeeze on capacity that occurs in the run-up to Chinese Lunar New Year.

Be prepared to pay higher rates for reliability and stability: Shippers should be prepared to pay higher rates for ocean freight shipping as did during the pandemic, and should now, with the Red Sea crisis being qualified as another black swan event. This will help them secure the necessary capacity and equipment for their shipments and ensure that their goods are transported on time.

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