The shipping industry on a global scale is currently facing very tough challenges due to the fact that the conflict in the Red Sea area has been growing, and the need to avoid the Cape of Good Hope has placed not only obstacles but also the risk of being bypassed, and so quite much the international trade has been disrupted.
What initially was a regional security issue has now developed into a global supply chain emergency, thus becoming a crisis that is in its fifth month.
The cost of shipping has risen to such a high level that the Shanghai Containerized Freight Index has indicated an average increase of 300% in rates for the routes between Asia and Europe in comparison to December.
Such significant hikes are not only being felt by the end consumers, who are already experiencing rising prices due to the same, but are also further contributing to inflation in those economies that are trying to recover from the repercussions of the pandemic.
The most serious attack on commercial vessels took place yesterday due to which it was made known by the major shipping companies that all Red Sea transits would be stopped for an uncertain period of time. After this episode that has brought substantial damage to three container ships, the route has practically been closed which means one of the world’s most vital choke points is no longer available.
It is estimated that the extra leg of the trip that goes around Africa will last about 14 days in shipping times between Asia and Europe. Consequently, there are now very long delays in delivering the goods, and at the same time, manufacturers are being forced to reconsider their strategies, which were previously based on a just-in-time inventory.
A few remote means have even been resorted to, by some entities, which involve the air freighting of some vital parts despite the fact that the costs are way above the ground.
European car producers have been hit really hard by the crisis, being the group of automotive companies most affected by the situation. This week two major car manufacturers from Germany had to scale down production because of difficulty in obtaining automotive parts, while, in France, one car manufacturer reacted to the situation by closing down their plant for some time, causing unemployment to numerous workers across the continent.
Retailers are now giving a warning of potential merchandise shortages for the upcoming summer season as the arrival of goods was delayed and now remain in the process of being transported. The situation that has arisen, of the transportation getting stuck, has caused some major retailers to book their own ships in order not to break the supply chain, in a move that has never been seen before.
The insurance sector has had to act dramatically as the possibility of risks increasing has become more prominent. The war risk premiums for vessels transiting the affected zones increased by ten times in case of a war outbreak. To make matters worse, certain insurers have pulled the plug on the sailings of some routes, thus further complicating the shipping operations in the area.
The tanker traffic situation has the energy industry lying in wait as it has seen the rates decrease by more than 70%. Although the prices of oil have not gone up significantly yet as the world reserves of crude are at a satisfactory level, soon oil tanker incidents can cause major market volatility and price hikes as well.
The crisis of the port congestion has been made by the European and Asian ports that are struggling to accommodate the ships that have been redirected and are coming in at an irregular time. Dwell times for containers have gone high up to 45% in the major ports of Europe thus creating obstructions that add to the delays of the system.
The issue has prompted intense debates on the subject of supply chain resilience and nearshoring among multinational corporations. According to a recent survey of executives in the manufacturing sector, the number of those who are opting for diversifying the sources of raw materials by means of transferring their production facilities to other places is as high as 68%.
Small and mature size businesses have reported being affected disproportionately by the shipping crisis and being outside of the resources and scale to negotiate favorable freight rates or alternative transportation arrangements. Industry associations have called for government intervention to support vulnerable businesses through the crisis.
Non-green concerns have been spotted due to the impact of the shipping rerouting. The routes around the African continent that the ships are now taking are much longer than before. As a result, fuel and emissions have also increased by 20% in the global shipping fleet. This increase in pollution could be a serious threat to the goal of carbon-neutral maritime transportation.
Experts in maritime security believe that the problem could drag on for a year under diplomatic deadlock. Furthermore, the experience of naval patrols being not able to guarantee maritime security would continue while the ships without military convoys remain exposed to piracy.
Technology corporations are revolutionizing the marine industry by providing various breakthrough solutions, e.g., advanced predictive analytics, and autonomous vehicles technology which through the removal of human crews hopefully will decrease the critical areas where ships have to navigate. This digital transformation may redefine and fast-track the growth of the marine sector.
The impact of the crisis extends far beyond the shipping and logistics sectors. As a result of manufacturing delays, there have been negative repercussions through global supply chains, leading to the disturbance of the production schedules, loss of jobs and a shrinkage in business growth except for major economies that rely on international trade.
The financial markets have reacted to the crisis by exhibiting an increase in the volatility of the shipper’s shares and the sectors associated with shipping. This is where investors evaluate the risk premium at which companies with connections to global trade are exposed, and this, while the commodity futures markets have been going through unusual price days owing to the uncertainty of the delivery times.
Countries mean to mitigate the consequences of the crisis by resorting to emergency measures like releasing strategic reserves of essential materials, providing financial assistance to affected industries and increasing the diplomatic efforts of conflict resolution. Nonetheless, the intricate nature of the geopolitical relations means that a quick decision is hardly likely to be taken.
With the crisis being in a state of flux, the business community and policymakers are left with the burden of making difficult decisions on adjustment in the short term and the long term change of the patterns in global free trade. The present collapse is expected to bring forward the reorganization of supply chains that was set off by the pandemic, which is more permanent and is likely to have more impact on the global economy.
