With the Red Sea diversions by shipping companies including Maersk continuing amid the risk of attacks by the Houthis, global logistics managers are faced with a two-front storm of rising ocean and air freight prices and stranded cargo. Both are threats to the global supply chain after three tumultuous years of inflationary pressures and delays from Covid disruptions which recently seemed to finally have been vanquished.
The ceiling in ocean freight prices shot up in a matter of hours on Thursday as a result of more vessels diverting from the Red Sea. CNBC has learned that logistics managers were quoted this morning an ocean freight rate of $10,000 per 40-foot container from Shanghai to the U.K. Last week, rates were $1,900 for a 20-foot container, to $2,400 for a 40-foot container. Truck rates in the Middle East now being quoted are more than double.
Alan Baer, CEO of OL USA tells CNBC while pricing is undergoing rapid adjustments as ocean carriers work to recover the added costs of diverting their vessels, these massive jumps in rates need to be clarified as the shipping community of importers and exporters, along with government regulators seek to better understand the overall drivers of these large increases.
“During Covid, we had a slower build-up in freight prices due to the impact the pandemic had on the global supply chain,” Baer said. “What we are experiencing here is a light switch event where vessels are being redirected in real time. But, that said, in certain trade lanes you are seeing freight rates going up between 100 to 300 percent. This does not appear to be totally driven by changes in supply and demand.”
158 vessels diverted from Red Sea holding $105 billion in trade
As of Thursday morning, 158 vessels are currently re-routing away from the Rea Sea carrying over 2.1 million cargo containers, Kuehne + Nagel tells CNBC. The value of this cargo based on MDS Transmodal estimates of $50,000 per container is $105 billion.
There is no short-term end to the attacks in sight.
IKEA is among the companies to indicate that the trade diversions will impact product availability. It told CNBC that while it does not own any container vessels, it is working with transportation partners to manage shipments and to ensure the safety of the people working in the IKEA value chain.
“What we can share for now is that the situation in the Suez Canal will result in delays and may cause availability constraints for certain IKEA products,” said an IKEA spokesman. “This is our main priority. In the meantime, we are evaluating other supply options to secure the availability of our products, and we continue to monitor the situation closely going forward.”
French dairy and plant-based products company Danone is disputing reports of impacts on its supply chain, with a spokesperson emailing CNBC, “There has been no significant short-term impact reported on Danone’s activity. We are closely monitoring the situation, in relationship with our suppliers and partners. We will not be making any further comments.”
RED SEA – NOVEMBER 20: (—-EDITORIAL USE ONLY – MANDATORY CREDIT – ‘HOUTHIS MEDIA CENTER / HANDOUT’ – NO MARKETING NO ADVERTISING CAMPAIGNS – DISTRIBUTED AS A SERVICE TO CLIENTS—-) A screen grab captured from a video shows that cargo ship ‘Galaxy Leader’, co-owned by an Israeli company, being hijacked by Iran-backed Houthis from Yemen in the Red Sea on November 20, 2023. (Photo by Houthis Media Center / Handout /Anadolu via Getty Images)
Anadolu | Anadolu | Getty Images
Vessels move on global water routes called “strings,” and containers from around the world can be on a single vessel as a result of the different ports a vessel will visit on its string. When a vessel is delayed because of re-routing that means all shippers from a multitude of countries who have cargo on that vessel, or are waiting for that vessel to pick up their containers, are faced with delays.
While logistics managers have no control over containers presently on the re-routed vessels, they do have control over stranded containers that are not being picked up in European or Middle Eastern ports, and import containers in Asia getting ready to be loaded on vessels.
Options for ‘stranded’ cargo
Logistics CEOs tell CNBC they are presently sorting out this cargo, and for the cargo considered “stranded” in Europe or the Middle East, they are looking to move select products by air as a possible solution. U.S. shippers are also assessing alternative trade routes like the TransPacific to the West Coast, and even the Panama Canal, to access Gulf and East Coast ports, with decisions coming down to analysis of transit time and freight costs.
Ports like Dubai and Aqaba are being reviewed as possible Middle East alternatives.
Being nimble is key for logistics to keep trade moving. Ocean carriers including Maersk, CMA CGM, and Hapag Lloyd have invested in their logistics supply chain management and have collaborated with other logistics companies to better control their clients’ container destiny and be able to respond to crises quickly.
Maersk has more than 20 aircraft with regular global flights around the world and just like other carriers, has access to place freight in the belly space of the major airlines. There is also the ability to move the cargo by rail.
CNBC has learned that for cargo in ports where re-routed ships cannot call, smaller feeder vessels will be deployed to pick up those containers and those vessels will then travel to a larger port. Once there, the containers will be loaded onto container vessels with more carrying capacity and continue on the longer ocean journey.
To help clients decide what shipping routes to use, OL USA has supplied a map to break out the delays on the ocean routes for future orders.
Air freight price spikes
U.S. shippers have several ocean route options, but European shippers do not. Europe heavily depends on the Suez. The re-routing for Europe has a longer transit time than the United States and as a result, European shippers are looking to the air to move their products.
Judah Levine, Freightos head of research, said while the Freightos Air Index daily rates for China to N. Europe shipments had been declining since late November, the push to air this week has fueled air freight prices.
“This week they’ve increased 13% from $3.95/kg to $4.45/kg since ocean carriers made widespread diversion announcements, possibly reflecting an increase in air cargo demand from ocean to air shifts,” said Levine.
Brian Bourke, chief growth officer of SEKO Logistics, says the severity of a Red Sea impact on the global supply chain all depends on the length of time of the re-routing.
“Every day this continues it escalates, starting with Europe and then the U.S. East Coast, you will start to see more conversion from ocean freight to air,” said Bourke. “Starting with higher value goods like consumer electronics, high-value consumer product goods and fashion apparel. This is due to the longer lead times that will increase inventory carrying costs and working capital which justifies the higher cost to move goods much faster.”
In an advisory to clients, shipping company HMM wrote, “Given the intricate nature of the current circumstances, HMM faces the decision of implementing a waiting period of undetermined duration or exploring alternative routes with additional costs.”
A global inflation warning
The sudden jump in ocean freight and its inflationary impact also depends on the duration of the vessel re-routing and the length of time shippers pay the higher freight costs. Logistics CEOs tell CNBC once the timeline hits the one-month mark, inflationary pressures will be felt and seen in the supply chain and eventually at the consumer level.
CNBC previously reported that MSC, the world’s largest ocean carrier, was the first ocean carrier to increase rates from India by 30-40%.
“To many, the jump in rates from India to the USEC [U.S. East Coast]] from approximately $2,000 per 40-foot container to $7,000 per 40-foot container in just 30 days appears egregious,” Baer said. “Is this rate increase really the level required to recover costs, or are they simply taking advantage of an unfortunate situation for the entire global community?”
Baer said shippers need stable pricing and vibrant economies to generate demand. MSC did not immediately respond to a request from CNBC for a comment on its rate increases. Traditionally, ocean carriers do not expand upon information released in their client advisories.
Logistics CEOs who have spoken with CNBC say they would like more transparency on cost increases since the ocean carriers are no longer paying the $500,000-$600,000 toll to pass through the Suez Canal but are increasing rates.
Retailers in the American Apparel and Footwear Association are closely watching the situation in the Red Sea and they are urging the full and immediate deployment of Operation Prosperity Guardian to ensure the protection of the vital waterway.
“With 98% of apparel imported, it is absolutely essential to have safe and affordable shipping,” said Steve Lamar, CEO of AAFA. “Members are already being forced to divert goods and are encountering surcharges.”
He alluded to the 2021 Suez Canal obstruction as an example of how any disruption in the trade gateway has immediate implications for the delivery and cost of goods.
Federal Maritime Commission Chairman Daniel Maffei told CNBC earlier this week that it is monitoring the situation and are aware of shipper concerns.
Jon Gold, vice president of supply chain and customs policy for the National Retail Federation, said its members continue to work with ocean carrier partners to address the ongoing situation in the Red Sea and Suez Canal.
“These disruptions are adding two or more weeks to transit times for retailers, resulting in increased rates,” said Gold. “As supply chains have begun to normalize again, the added pressure from these additional costs and delays could have a significant impact.”