U.S. and England strike back against Houthi pirates as Red Sea situation continues

Earlier today, various media reports indicated that the United States and England have taken retaliatory measures against the Yemeni Houthi pirates for their ongoing series of attacks on the Red Sea shipping lane, in response to the ongoing Israel-Palestine conflict.

“Ongoing Houthi attacks in the Red Sea are illegal, unacceptable, and profoundly destabilizing,” the White House said. “There is no lawful justification for intentionally targeting civilian shipping and naval vessels. Attacks on vessels, including commercial vessels, using unmanned aerial vehicles, small boats, and missiles, including the first use of anti-ship ballistic missiles against such vessels, are a direct threat to the freedom of navigation that serves as the bedrock of global trade in one of the world’s most critical waterways.”

Going back to late last year, the Houthi pirates have attacked nearly 30 commercial vessels moving through the Red Sea, in the form of targeting commercial vessels with missiles, small boats, and attempted high jackings, according to a statement issued by the White House.

As previously reported, various global container shipping lines have stated that they will pause all vessels bound for the Red Sea/Gulf of Aden, with Maersk saying its vessels due to transit the Red Sea /Gulf of Aden will be diverted south around the Cape of Good Hope for the foreseeable future.

The impacts of this situation on supply chains vary, with most industry stakeholder maintaining they will not abate anytime soon.

That was made clear in a report issued by S&P Global earlier this week, which observed that with all major container lines now transiting through the Cape of Good Hope, average shipping rates have gone up to $4,500 per 40-foot equivalent, from $1,500 in October, for Asia-to-Europe lanes.

“This situation is proving to be highly dynamic, making logistics planning for supply chain managers increasingly complex,” the report said. “The diversion of container shipping away from the Suez Canal had already started in early December. The proportion of westward sailings from Asia to Europe routing via Suez was 78% between October 7, 2023 and November 30. It then fell to 68% in the period to December 20 and finally fell to 15% in the last week of 2023 and zero currently.”

What’s more, the report explained that not transiting through the Suez Canal has a direct impact on supply chains connecting Asia and Europe, with alternative routes resulting in higher shipping costs and delays of roughly 10 days for sailings around the Cape of Good Hope, with slower round trips needing up to 7.1% of additional capacity.  

In an interview, Chris Rogers, Head of Supply Chain Research for S&P Global Market Intelligence, told LM that, from a functional perspective, the Suez Canal is closed, except, for example a company shipping Russian oil to India.

“It is closed for all of those long-haul shipping strings, and it is going to take between five and 15 days, call it an average of 10 days, to get [cargo] to where it needs to go,” he said. “Shipping rates have jumped but it is not known, at this point, whether it is sustainable or not. The shipping industry isn’t well-equipped to deal with these kinds of shocks and is not a particularly flexible industry. It cannot quickly come up with new vessels and ports. We saw that during the pandemic. The good news is there is a lot of extra capacity coming so if it is taking longer to get anything to where it needs to go, then you have the spare capacity to be able to handle that, because effectively the capacity of a vessel drops by the equivalent of the extra shipping time.”

All vessels that would have gone through the Suez Canal or the Panama Canal—and now going through the Cape of Good Hope—is the equivalent of cutting global ocean shipping capacity by about 10%, according to Rogers.

On a more positive note, though, he said that shippers at least still have a viable option via the Cape of Good Hope, as opposed to the U.S. West Coast during the height of the pandemic, when the Ports of Los Angeles and Long Beach were full, with many vessels waiting to unload, making it key not to overstate the severity of this situation.

Looking ahead, Rogers said this situation increases the urgency for shippers and carriers to get a jump on 2024 Peak Season planning processes.

“We are going to be dealing with this situation for a while and need to think about it in those terms,” he said. “Companies are going to be thinking about how to absorb or pass on higher shipping costs and the costs of higher inventories. Do they want to start booking places on vessels for peak earlier than normal? It seems likely.”

And while carriers will look at things like surcharges, rate hikes, and blank sailings as a way to mitigate the current situation, Rogers said that they need to take a top-to-bottom approach to their service strings.  

“You can get from Singapore to Europe quicker by not stopping in India, but how do you serve India then,” he said. “If this lasts into Easter and beyond, which I think it will, then the shipping lines are going to have to start redesigning their service plans.”

Looking at the impact of this situation on U.S.-based shippers, Matthias Menck, Principal Consultant at Proxima, a supply chain and procurement consulting firm, said that businesses will be facing delays in receiving stock, which will have the most significant impact on those selling seasonal goods.

“In the longer-term, lead times will increase for imported goods, meaning businesses will have to shift their normal decision-making timescales to ensure they have adequate stock,” said Menck. “It is impossible to predict what will happen next, and, with the geopolitical situation in the region showing no signs of abating soon, businesses need to brace themselves for long-term disruption and restart conversations around onshoring or nearshoring to boost resilience.”

Like S&P Global, Proxima said that in the short-term, ocean-freight costs for shipments bound for the East Coast from China will continue to increase.

“Prices are already up by 52% since the crisis began, as ships look to reroute around South Africa as part of their trans-Atlantic route, leading to a delay of up to three weeks,” said Menck. “Whilst East Coast shipments are bearing the brunt, businesses are increasingly looking to reroute shipments entirely to go to West Coast ports, pushing up prices there as freight firms adjust their capacities. Businesses are now looking at spending $1,000 more for West Coast shipments than they were before the situation in the Red Sea began.”