The rain of drones loaded with explosives and Houthi missiles on merchant ships in the Red Sea has turned the once dull and reliable shipping industry into a focus of uncertainty and negative surprises, with unexpected delays due to route changes and cost overruns due to rising freight costs and outrageous insurance against the possibility that the cargo never reaches its destination. It is exactly the opposite of what companies intend to do, placing their orders months in advance so that they can be delivered on time by heavy container ships, slower but cheaper and with more cargo capacity than airplanes.
The more chronic the crisis becomes, the longer the list of those affected becomes. The sources consulted indicate that despite the extent of the diversion of the ships, which were forced to avoid the Suez Canal and take a detour around the Cape of Good Hope, meaning at least nine more days of travel, the impact is not yet dramatic global economic growth or inflation. “Initial estimates suggest, for now, that the impact of the Red Sea crisis on inflation will be moderate, with an additional increase of a few tenths this year and an impact mainly concentrated on imported goods,” explains Ángel Talavera, Chief European Economist at Oxford Economics. The Bank of Spain is also reducing the magnitude of the shock: it assumes that weak global demand and the absence of congestion in the logistics sector will prevent yesterday's congestion.
The key word, however, is that if the US and EU military missions fail to achieve their goal of restoring security to the region, the consequences could be very costly. They are already associated with inconvenient surcharges and hasty adjustments. This is the case for automotive companies whose supply chain is based on the just-in-time model and are less accustomed to warehousing. “Some automotive suppliers based in Spain are affected by delays in the delivery of components or raw materials necessary for their manufacture, as well as an increase in costs because they have to resort to air transport instead,” say the employers. Serncar.
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The crisis cabinets did not interrupt their meetings to soften the blow. “As it is an extremely flexible and resilient industry, they are already taking measures such as increasing inventories, adjusting transit times, routing orders to suppliers and contingency plans,” adds Sernauto. Companies such as Tesla, Volvo and Michelin have already announced temporary shutdowns at some of their production plants in Europe because they do not have the necessary materials in time. This will result in thousands fewer cars being manufactured, in Tesla's case between 5,000 and 7,000, and the shutdown of one of its factories in Germany.
“Non-urgent orders will be postponed, the key variable is the duration,” say sources at business association CEOE. Talavera agrees. “The 2021-22 precedent shows us that there is a risk of exponentially greater impact if the crisis continues for an extended period and the blockage causes disruptions in supply chains. “Europe imports liquefied natural gas from Qatar, which transits the Suez Canal, and a significant portion of oil shipments could also be affected.”
More expensive freight and insurance
The major consumer association Aecoc warns that the impact in sectors such as food, textiles and fashion, hardware and DIY supplies or technological consumer goods is already significant, as freight rates have become “300%” more expensive in some cases, as well as higher premiums demanded by insurers , who sometimes even refuse to take on the transport risk.
Nevertheless, employers assure that there will be no shortages of inventory for the time being, i.e. that shortages will be avoided. “In recent weeks, companies have focused their efforts on anticipating the purchase of raw materials, looking for new suppliers in closer geographical areas and managing their supplies through new routes and other means of transport as an alternative to sea transport,” they point out.
From the Spanish Food and Drink Industry Federation (FIAB) they note that warnings to importing companies to increase their safety stocks due to expected delays are increasing and they assume that the goods in warehouse are increasing due to the longer transit times. With more time spent at sea and less time available, difficulties in finding space are also increasing, although the number of new boats has increased in recent months. “The direct impact affects the routes with Asia and the Middle East, but due to the lack of containers and ships there is also an indirect impact on the route between Europe and America,” FIAB sources say.
Completing the perfect storm is the celebration of Chinese New Year in February, a period that has historically been accompanied by slowdowns in production, limited transportation operations and supply chain disruptions. And with the problems in another important artery, the Panama Canal, which has restricted the passage of ships due to a severe drought. “Container ships also travel to the ports of Los Angeles and Long Beach and transport these shipments across the United States to the East Coast. Air freight traffic for urgent shipments is increasing and manufacturers are experiencing delays, said Lisa Anderson, president of supply chain consulting firm LMA Consulting Group.
Given the series of unforeseen events in recent years, from the blockage of the Suez Canal by the Ever Given ship to the supply crisis during the pandemic, Anderson believes that companies need to be more proactive and take the initiative rather than simply react when something happens happens and it's too late. “This means building alliances and regional sources of supply, better planning inventory levels and being at the forefront of technological advances.”
Low impact on the pandemic
Investment manager Federated Hermes expects the economic impact of the disruptions to worsen in the first two months of the year as cheaper trips contracted before the attacks are replaced by current trips at higher fares. Given this, cost overruns are even lower than during the recent supply crisis. “The recent increases in container shipping rates are significant, but do not come close to the sharp increases in 2020 and 2021 during the Covid-19 pandemic.”
Then as now, the shipping companies were the big beneficiaries, multiplying their income and increasing profits while simultaneously increasing prices on the stock markets. On the losing side of the Red Sea crisis, the insurer Crédito y Caución sees European manufacturers in first place. “They import a wide range of intermediate goods from the Asia-Pacific region, such as electrical appliances, high-tech goods, rubber and plastics, chemicals and machinery. If the crisis continues, waiting times, prices and congestion at ports are likely to increase. This could accelerate a return to greater willingness to maintain higher inventories out of caution,” they note.
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