Industry experts assess Red Sea shipping situation in House T&I Committee hearing

With the global supply chain remaining on high alert amid the series of attacks on the Red Sea shipping lane by the Yemeni Houthi pirates in response to the ongoing Israel-Palestine conflict, a hearing held this week by the House Transportation and Infrastructure Committee, examined the impact of this situation on various aspects of goods movement and the supply chain.

Going back to late last year, the Houthi pirates have attacked nearly more than commercial vessels moving through the Red Sea, in the form of targeting commercial vessels with missiles, small boats, and attempted high jackings, the White House noted earlier this year. 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.

What’s more, the various impacts of this situation on supply chains are vary, with most industry stakeholder maintaining they will not abate anytime soon.

At the hearing, entitled “Menace on the Red Sea: Securing Shipping Against Threats in the Red Sea,” National Retail Federation (NRF) Vice President of Supply Chain and Customs Policy Jonathan Gold offered up testimony, in representing the retail sector on various aspects of this situation, including the impact of vessel diversions away from the Red Sea, concerns with increased rates and fees, and the potential for U.S. port congestion and risk mitigation strategies retailers are implementing.

“Having a safe, efficient, predictable and timely supply chain is critical to the success of any retailer. The ability to ensure that products are available for the consumer, whether they shop instore or online, is key to the retail supply chain,” said Gold. “We all saw firsthand the disruption caused when supply chains were completely overwhelmed from beginning to end during the pandemic. Through significant efforts on behalf of the private sector and governments, supply chains were returning to normal as trade flows returned to pre-pandemic growth levels and congestion issues were resolved. Unfortunately, we are now faced with another significant supply chain disruption with the attacks impacting commercial shipping through the Red Sea and Suez Canal. This is on top of disruptions already impacting the flow of commerce through the Panama Canal due to restrictions from low water volumes.”

Gold added that while the overall volume of U.S. trade that transits the Suez Canal is only about 12%, the impacts of the disruptions are being felt far and wide. And he explained that the biggest challenge for retailers posed by the ongoing disruptions is the additional volatility, cost, uncertainty and overall risk to the supply chain.

“Once again, retailers and other shippers are being forced to readjust their supply chains to ensure product delivery,” he noted.

As for the challenges this situation for NRF’s retail shipper members, Gold cited:

• increased shipping timelines, with carriers shifting sailings around the Red Sea and going around the Cape of Good Hope, which has added 10-to-14 days to supply chains due to longer vessel transit times;
• increased shipping costs related to longer transit times, and increased spot market costs, coupled with ocean carriers passing along surcharges and fees to customers, including Peak Season surcharges, Transit Diversion Surcharges, War Risk Surcharges, and Emergency Contingency Surcharges, among others, with Gold added that NRF members seeing carriers request increases between $1,500-$3,000 per container, for a 38%-to-73% increase, for impacted cargo and also other routes like Europe to the U.S.; and
• material and component availability, with retail shippers indicating their overseas vendors are seeing some challenges in sourcing raw materials in a timely manner, coupled with increased costs

Looking at ways to mitigate risks, Gold cited various strategies including: transiting via the Cape of Good Hope, shifting cargo to West Coast ports to avoid disruptions and additional time related to Red Sea issues; shifting to air cargo for more sensitive and timely shipments; and shipping earlier, with disruptions expected to increase.

In Gold’s concluding remarks, he explained that these ongoing challenges are significant and will worsen over time.

“We appreciate the attention and actions that the administration has taken with Operation Prosperity Guardian and building an international coalition,” he said. “We know that more work needs to go into the effort to ensure safe passage for vessels and mariners through the Red Sea. Their safety is of the utmost importance. We know the future impacts that will result from ongoing disruptions. While we are addressing the immediate issues impacting transit through the Red Sea and Suez Canal, we need to make sure we are preparing for the congestion issues that will impact U.S. ports in the coming months.”

Also speaking at the hearing was Charles “Bud” Darr Executive Vice President Mediterranean Shipping Company (MSC).

Darr said in his testimony that MSC has assessed that the security situation in the Red Sea and Gulf of Aden is not safe enough to protect its most vital asset—its seafarers—nor its customers’ cargo or its vessels.

“We are diverting services that would typically transit the Red Sea and the Suez Canal around the Cape of Good Hope (CGH), until we are confident the security situation is safe enough to have our seafarers return to the Red Sea,” he said. “We are also aware that many other major ocean carriers and other shipping interests have made similar decisions…[with] container vessels above 7,500 TEU diverting voyages from the Red Sea and Suez Canal to go around the CGH.

The Suez Canal is a vital trade route for liner shipping and supports 10%-to 15% of world trade and 30% of global shipping volumes. Thus, the decision to avoid the Red Sea and Suez Canal is a significant one.”

And the ongoing drought in the Panama Canal, which Barr said is critical route for liner shipping, is being impacted, with a 36 percent reduction in Panama Canal transits, coupled with the Panama Canal authority recently announced it is cutting daily ship crossings to 22 per day, down from 38 per day last year, as well as reducing the maximum draft of vessels from 14.9 to 13.4 meters, which requires liner shipping using the canal to carry smaller numbers of containers.

“Prior to the Red Sea attacks, many shipping companies diverting from the Panama Canal to avoid delays or reduced cargo loads were relying on the Suez Canal and Red Sea as an alternative route for their vessels,” he said. “The Red Sea security situation has severely limited this option, which puts further pressure on liner shipping companies, and requires diversions to longer routes to keep maritime commerce flowing.”

From a business perspective, Keith Prather, Managing Director, Armada Corporate Intelligence, said at last week’s SMC3 JumpStart 2024 conference in Atlanta that the Red Sea situation is unlikely to calm down anytime soon, adding that some maritime companies, at the moment, are viewing it as indefinite.

As for the real long-term impact, from a pricing perspective, Prather said that it could be viewed as a short-term blip with global distribution processes adjusting.

“We always find a way to work around it, and, in this case, unlike the pandemic when manufacturers shut down distribution systems then into the ports shutting down, you were offline for a month and a half, and it really screwed up the global economy,” he said. “In this case, we still have freight on water and it is still moving. Once we get through this initial little shock of maybe multiple shifts and pumping docks up in Europe and getting that congestion cleared, then I think we fall into this predictable cycle. And I think things settle back down.”

Many of those initial shocks from the Red Sea situation led to estimates indicating 20%-to-25% of global maritime excess capacity was stripped, although that comes with a caveat.

“Be careful how you read that data, he said. “It's excess capacity we've stripped out, so there is still excess but just not as much as we had before this. But I think then the pricing environment starts to slow down a little bit, but it's going to take probably well into the into first quarter and early second quarter.”