With the ongoing turmoil in the Red Sea waterway in recent days, it means that the two important shortcuts to the global shipping industry - the Panama Canal and the Suez Canal, which operate 20% of global trade, are both in a predicament, causing freight rates and global shipping stocks to soar.
According to shipping data from the logistics platform Flexport as of late Wednesday local time, there are currently nearly 180 container ships that have started to detour the Cape of Good Hope or stay to observe the situation of the Red Sea channel. If the US led escort operation fails to achieve rapid results, hundreds of ships will definitely join their team in the future. At the same time, the situation on the other side of the Panama Canal will have to wait for the drought to ease.
(Data chart of ships passing through the Panama Canal)
Both major canals have experienced problems, making international shipping increasingly similar to before the opening of the Suez Canal in 1869. A large number of freight ships have diverted and caused shipping costs to continue to rise. The Drewry International Container Index on Thursday showed that freight rates for 40 inch containers from Asia to Nordic countries have increased by 16% in the past week and nearly 41% this month.
Bad timing
For the global shipping industry and supply chain, the timing of the current situation with the two major canals is very unfavorable.
For all ships that detour the Cape of Good Hope route and wait in place, they arrive at the target port at least one to two weeks later. At present, it is one of the busiest periods on the Asia Europe route, and retailers are busy with the Christmas shopping season, waiting to replenish inventory from Chinese factories. The Chinese Lunar New Year will also arrive in early February, which means that most factories are only a little over a month away from their holidays.
At the same time, the global economy, especially the economic growth of European and American countries, is still gradually slowing down, making it difficult for many European and American businesses to finalize their demand plans for 2024.
Trine Nielsen, Director of European Ocean Freight at Flexport, said that doing business is not easy these days, and the potential risk of inventory depletion is clearly something that Flexport encourages everyone to pay attention to, as its costs may be higher than paying for expedited logistics services.
Faced with the uncertainty of sea transportation, many companies have begun to adopt alternative solutions.
According to an unnamed senior executive of a major logistics group, they are currently urging shippers to consider all alternative options to avoid these two canals, including using air transportation, despite the cost increase of the latter.
In an email sent to the supplier, American clothing retailer Abercrombie& Fitch stated that they are considering the option of air transportation. For this retailer, the main suppliers India, Bangladesh, and Sri Lanka all need to take the Asia Europe route. Another European furniture leader, IKEA, has bluntly warned that there may be shortages. British bedding manufacturer Button& Sprung needs to purchase fabrics from China and India, and it is also expected that the Red Sea crisis may cause some supply disruptions.
Actual transportation capacity also needs to be discounted
For this crisis, the industry generally expects that clothing retailers and businesses that need to import large, low-priced goods may be most affected.
Danish logistics supplier DSV estimates that longer transportation times and longer vessel occupancy will result in a reduction of up to 20% in transportation capacity.
Eric Martin Neuville, Executive Vice President of Geodis, a freight forwarding company, predicts that if the Wangjiao route is well followed, it will take 60 days for cargo ships to travel from China to Europe, while the Suez Canal route will take approximately 40 days. He also expects that costs may be four to five times higher as a result, and the situation from Asia to the East Coast of the United States is roughly similar.
As a comparison, air transportation between China and Europe only takes 48 hours, but for many large and low value goods, it is simply impossible to use such expensive logistics methods. Martin Neuville added that, generally speaking, train transportation would be a reasonable option, but the Russia-Ukraine conflict also had an impact on intercontinental railway transportation.
Multifactor Game
From the current situation, the Yemeni Houthi armed forces have announced that they will continue to take action, while the US escort operation is more of a passive defense form, and the effectiveness remains to be seen. The Panama Canal also depends on the natural environment, and the current expectation is that the problem will continue until at least February next year.
Rahul Kapoor, head of shipping research and analysis at S&P Global Commodity Insight, interpreted that although slowing consumer demand can limit freight rates, the economic impact of this storm will continue to accumulate until waterway safety can be ensured.
For the global shipping and financial circles, there is still a problem that needs to be addressed - the Cape of Good Hope is known for its harsh climate and surging waves, and is also one of the most dangerous shipping routes in the world. So "running thousands of miles more" is not the only factor in estimating the risk of detours.
Lars Jensen, CEO of Vespucci Maritime, a shipping consulting company, said at an event this week, "Although you can easily say 'Okay, it's just an extra few thousand nautical miles, we can drive faster' while looking at the spreadsheet, it's not always smooth sailing when you navigate around the southern end of Africa. You should expect to encounter weather related delays once you cross that water area."