Where Will the Effects of the Red Sea Crisis Reach in Shipping and Supply Chains in the Arab Region and the World?

The Red Sea is one of the world's most important waterways, connecting Europe, Asia, and Africa through the Suez Canal. However, since late 2023, the region has been facing escalating violence and instability, with attacks targeting commercial ships.

These attacks have disrupted shipping operations, increased costs and risks, and posed a threat to global trade and supply chains. They have led to rerouting global shipments through the Good Hope Cape in Africa, causing trade delays and increased shipping costs.

This crisis has also intensified pressure on global supply chains, exacerbated by restrictions imposed on crossing the Black Sea following the conflict between Russia and Ukraine. Additionally, economic estimates suggest that longer voyages around the Good Hope Cape in Africa will cost ships an additional one million US dollars in fuel per trip.

Significance of the Red Sea:

The Red Sea is a narrow sea located between Africa and Asia, stretching from the Gulf of Suez in the north to the Gulf of Aden in the south. It is approximately 2250 kilometers long and 355 kilometers wide at its widest point. The Red Sea is divided into two parts by the Sinai Peninsula, the Gulf of Suez leading to the Suez Canal, and the Gulf of Aqaba leading to the port of Eilat.

The Red Sea is crucial for over 15% of the world's seaborne trade, including 8% of total grain trade, 12% of total oil transport, and 8% of total liquefied natural gas trade. The Suez Canal is also one of the most congested shipping lanes globally, serving as a vital link between the Mediterranean Sea and the Red Sea.

Economic Consequences on Supply Chains Due to the Red Sea Crisis:

The ongoing conflict in the Red Sea negatively affects the stability and expansion of the global economy. Various impacts on supply chains in the Arab region and the world due to the Red Sea crisis include:

  • Adding Uncertainty to the Global Supply Chain:
    The Red Sea issue continues to evolve, but its impact on global supply networks is more significant than when the COVID-19 pandemic first emerged. Service networks have been severely disrupted due to Red Sea strikes, with trade interruptions likely throughout 2024, causing more difficulties in the supply chain and increasing inflationary pressures.
  • Decline in Global Trade Volume:
    Attacks on shipping vessels in the Red Sea have become the primary factor in a 1.3% decline in global trade between November and December, according to a report by the Kiel Institute for the World Economy.
  • Rise in Shipping Costs:
    Shipping costs from North Asia to the US East Coast increased by 137%, reaching $5100 for a 40-foot container. Similarly, shipping costs to the US West Coast rose by 131% to $3700. China also faces challenges due to Red Sea disruptions, with shipping costs to Europe nearly doubling to around $7000 compared to $3000, posing a significant threat to its export-oriented economy.
  • Increase in Insurance Costs:
    The crisis has led to a substantial increase in insurance costs for trips to the Bab el Mandeb and the Red Sea, reaching 2%, compared to the usual 0.6% of the shipment value on the ship. This has caused a greater cost increase for passage through the Suez Canal due to cargo insurance companies incurring additional costs against war risks.
  • Route Redirection:
    Shipping companies have suspended operations in the Red Sea and worked on redirecting the routes of their ships and trucks to alternative paths, incurring additional expenses and delays of up to two weeks. The cost of transporting goods from Asia to Europe has increased by 175-250% due to redirection to these alternative routes. Gasoline and oil prices have also become highly volatile.
  • Decline in Production:
    Many companies have halted operations due to the significant disruption in the supply chain. Some companies have stopped production due to delays in receiving supplies, such as Tesla, which closed its factory near Berlin until the end of February. Suzuki Motor Corp's factory in Hungary also stopped production for a week due to delayed receipt of engines and other equipment. Volvo decided to temporarily suspend manufacturing operations at its plant in Belgium.
  • Delayed Delivery of Goods to Customers:
    Alternative transportation methods have led to increased fuel costs and reduced shipping efficiency, potentially resulting in higher import prices, including vital shipments of oil and grains in the Middle East and Asia.
  • Rise in Oil Prices:
    Concerns about the potential economic impact of disruptions in global trade through the Red Sea and escalating tensions in the Middle East have driven oil prices to $80. Prices are expected to rise further with the continuation of this crisis, especially considering the chaos in the Middle East, known as an energy hub.

How can shipping companies cope with the Red Sea crisis?

Shipping companies can navigate the challenges posed by the Red Sea crisis by implementing several measures. Companies in the shipping industry may consider the following strategies:

  • Rerouting and Planning: Shipping companies may need to reroute their vessels to avoid the Red Sea and explore alternative shipping routes to mitigate the impact of the crisis.
  • Adjusting Shipping Rates: Companies might need to adjust shipping rates in response to increased shipping costs and disruptions caused by the crisis.
  • Preparedness for Capacity Shortages: Shipping companies should be prepared for potential capacity shortages and plan for longer transit times due to vessel rerouting.
  • Monitoring the Situation: It is crucial for shippers to closely monitor the evolving nature of the crisis and its geopolitical complexities to make informed decisions regarding their shipping operations.
  • Addressing Supply Chain Disruptions: Shipping companies must proactively address potential disruptions in the supply chain, such as shortages of cargo containers and equipment, by seeking alternative sources and transportation methods.
  • Collaboration and Communication: Collaborating with shipping partners and effectively communicating with customers about potential delays and cost adjustments is essential to manage the impact of the crisis on shipping operations.

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