The Red Sea Crisis and Its Ripple Effect on Global Supply Chains and Sustainability

 

Introduction

The Red Sea crisis, ignited by attacks on commercial ships by Houthi rebels since December 18th, 2024, near the Bab el-Mandeb Strait, has reverberated throughout the global trade and shipping industry. This article explores the multifaceted impact of these events on global supply chains and sustainability, analysing short-term disruptions and proposing potential 

Solutions to address the challenges posed by this crisis.

Event Overview

The attacks on commercial ships in the Red Sea prompted seven of the largest shipping companies globally to reroute traffic away from the Red Sea, a critical shipping lane facilitating about 11 percent of global maritime trade volume annually. The strategic importance of the Bab el-Mandeb Strait, with its narrowest point at 25 km, cannot be overstated, as it serves as a vital link between Asia, Europe, and Africa, handling 30% of global container trade, including seaborne oil and LNG shipments. Cargo ships are being rerouted through the Cape of Good Hope, adding almost 30 to 40% of extra voyage time. 

Impact on Global Trade

The initiation of the Houthi bombings is marked by a sharp fall in both transit port calls and trade value at the Babel el-Mandeb choke point which falls within the range of Houthi heavy firepower while there is a simultaneous increase in the trade volume data for Cape of Good Hope.

In 2021 the Suez Canal blockage disrupted $9 billion/day trade for 6 days, costing $54 billion. The Red Sea crisis, lasting ~2 months, could incur potential losses exceeding $540 billion, excluding further costs like missed savings and emission damage. This loss will soar well beyond this estimate due to the rapidly escalating situation. To understand the impact in terms of volume, just on the morning of 21st December, 2023, 158 vessels were re-routed away from the Rea Sea aka 2.1 million cargo containers worth $50,000 per container totalling $105 billion.

Insurance coverage for ships taking the Swiss Canal route in early December was 0.07% but due to the increased risk in the region of a possible sinking or even hijacking the premium was increased to 1% of the cargo value. This prompted the shipping Companies to reroute their ships across the entire continent of Africa through the cape of good hope adding 89000 kilometres or 2 weeks additional sail time.

J.P. Morgan predicts these disruptions could inflate price index of essential goods by 0.7% and overall inflation by 0.3% in H1, 2024. Disrupted shipping and potential inflation rebound could keep core CPI near 3%, the price rise trickling into all sectors with a few months lag. Meanwhile, the energy markets are already spiking, pushing oil prices up as export routes of major oil producers flow via red sea. If extended, this conflict might also pose fuel procurement challenges for shipping companies to undertake their longer journeys across the Cape of Africa.

1. USA and Europe: Shipping rates from North Asia to the U.S. East Coast surged 137% to $5,100 for a 40-foot container, and to the West Coast by 131% to $3,700. The Red Sea and Suez Canal are also crucial for Europe's manufactured goods from Asia and energy imports from the Persian Gulf. Prices of Asia-Europe surged nearly five times. The Increased externality spending in international shipping for Europe alone is estimated at approximately $1 billion. Shipping costs to Europe from China more than doubled to about $7,000 from $3,000 in December 2023, posing a threat to its export-driven economy. 

2. OECD: 

The OECD countries, including UAE, Saudi Arabia, Bahrain, Kuwait, and Qatar, rely on the Red Sea route for exporting crude oil and LNG and are facing huge export shocks. Revenues from Suez Canal which are Egypt’s crucial source of foreign exchange has decreased to 40% from the beginning of the year compared to 2023, equivalent to a loss of approximately $300 million. 

3. Mediterranean 

The Mediterranean countries which only have ports in the Red Sea are at the risk of a potential regional war due to resource scarcity. Jordan, Sudan, and Ethiopia rely heavily on wheat imports transiting through the Suez Canal, with the Yemeni port of Aden supporting 90% of landlocked Ethiopia's trade. This already volatile region suffers from ongoing civil wars in Yemen, Sudan, Ethiopia, and Somalia with the recent crisis exacerbating humanitarian and economic crises as essential imports into their ports have stopped.

4. India 

For India the Red Sea route starts from ports of JNPT in Bombay or Chennai, heads west through the Arabian Sea, enters the Red Sea, and passes the Suez Canal into the Mediterranean Sea onwards to Europe. India's exports of basmati rice to Europe and import of energy are being impacted. According to think tank GTRI, the average container spot rates have doubled here since December 2023. Basmati rice exporters face a 233% hike in freight costs to $2,000 per 20-tonne container for destinations around the Red Sea. The route around Cape of Good Hope adds 10 days to India’s export time with our largest trade partner, USA and exporting to Europe take some additional 20-25 days. India is unlikely to face a crude oil shortage as the Houthis are not targeting Russian and Iranian oil tankers and West Asia oil which happens to be a big source of energy import passes via the Strait of Hormuz. But the reliance on this shipping route will certainly make our crude oil imports costlier- in January, India did not receive any crude oil from USA which is one of our top suppliers, according to data from market analytics firm Kpler. 

The increased Costs and Delays have an Economic Pillar aka the higher costs will impact medium scale businesses and consumers will face a reduced purchasing power as the price rise is caused by supply side rigidities The Social Pillar is that disruption in production, causes job losses and impacts livelihoods.

Impact on Supply Chain Management

1. Planning and Sourcing:

Disrupted Sourcing: Rerouting adds uncertainty and delays, making sourcing raw materials and finished goods more difficult and unpredictable.

Increased Inventory Costs: Disruptions and delays can lead to stockouts and product unavailability, impacting customer service and sales.

Impacting cash flow cycles: Merchandise arriving with a minimum 10-day delay results in correspondingly delayed cash collection, thereby creating liquidity constraints. This, in turn, restricts investment opportunities and may necessitate the diversion of funds from strategic initiatives to daily operational needs.

2. Procurement and Warehousing:

Higher Procurement Costs: Increased shipping costs and insurance premiums inflate procurement expenses for businesses. The longer transit time is absorbing at least 20% of the global container merchant fleet.

Warehouse Delays: Delays in deliveries can overload warehouses, impacting storage capacity and inventory management.

Operational Inefficiencies: The shift to longer routes disrupts established logistics flows, requiring adaptations and potentially impacting warehouse efficiency.

3. Logistics and Transportation:

Extended Lead Times: Rerouting significantly increases lead times, impacting production schedules, delivery commitments, and customer satisfaction.

Capacity Constraints: The surge in demand for alternative routes may strain available shipping capacity, leading to higher rates and potential shortages.

Multimodal Complexity: Businesses would need multimodal transportation (e.g., combining sea and land routes) in absence of alternatives, increasing logistical complexity and management needs. 

4. Opportunity Cost: The 15 days of additional cost could have been invested at the global interest rate of capital, say 6% increasing the capital base and innovation of shipping companies.

SDG Impact of the Crisis

Increased Emissions and SDG 13: Climate Action:

Rerouting significantly increases GHG emissions, hindering progress towards reducing shipping emissions by 50% by 2050 (SDG 13.2).

This directly impacts SDG 13.3, urging urgent action to combat climate change and its impacts.

Environmental Impact and SDGs 14 & 15: Life Below Water & Life on Land:

Longer journeys increase waste generation and potential spills, threatening marine ecosystems and biodiversity (SDG 14.1 & 14.5).

Conflict in the Red Sea further damages ecosystems and disrupts fisheries, affecting food security and livelihoods (SDG 15.1 & 15.6).

Challenges to Sustainability Goals:

The crisis jeopardizes progress towards achieving SDG 7: Affordable and Clean Energy, by hindering decarbonization efforts in shipping.

It threatens the achievement of SDG 12: Responsible Consumption and Production, due to increased pollution and unsustainable practices.

Solutions

Finding an alternative to the Red Sea route is a challenging task due to the saturation of the Cape of Good Hope route and the capacity limitations of air shipping compared to container shipping.

Route Optimization: Companies like Mediterranean Shipping, Maersk, and Evergreen can explore routes around the southern tip of South Africa to reach the East Coast and Gulf Coast of the United States. Significant investments in U.S. ports, including dredging and bridge elevation, are imperative to enable these import routes.

India's Alternate Trade Routes: India needs to focus on finding alternate sea routes to offset its heavy reliance on the Red Sea for energy imports. Utilizing ports like the deep-water port in Chabahar, Iran, can help diversify trade routes and reduce dependency on vulnerable regions.

Improving Port Efficiency in the region: Enhancing our port efficiency is crucial. This involves streamlining processes to quickly load and unload containers, optimizing terminal operations, and investing in infrastructure to facilitate smooth transportation of containers from ports to the wider transportation network.

Efficiency through Larger Ships: Potential efficiency gains by utilizing larger vessels as the size limitation of the Suez Canal will not be a limitation across the horn of Africa. Ships exceeding 400 meters in length could be deployed, carrying more cargo containers, up to 30,000 boxes, thereby maximizing shipment capacity.

Infrastructure Upgrades: To accommodate ultra-big container ships, ports need extensive upgrades. This includes dredging ports to deepen them, raising bridges to allow passage for taller ships, and installing new cranes and lay down areas to handle larger volumes efficiently.

By implementing these solutions, the efficiency and resilience of global supply chains can be improved, mitigating the impact of disruptions by the Red Sea crisis and ensuring the smooth flow of goods worldwide. 

Conclusion

 Increased costs tend to burden vulnerable populations, affecting living standards and access to essential goods because often developing countries like India are disproportionately affected by cost increases and delays, hindering their growth. The major learnings from this incident should be that reliance on single routes for trade causes vulnerabilities, hindering economic stability. It is important to build sustainable and diversified trade routes while focusing on optimizing the efficiency in the literal chokepoints aka ports. Disruptions also lead to increased transportation emissions and pollution which calls for an immediate substitution to clean s

The Red Sea Crisis and Its Ripple Effect on Global Supply Chains and Sustainability

Introduction

The Red Sea crisis, ignited by attacks on commercial ships by Houthi rebels since December 18th, 2024, near the Bab el-Mandeb Strait, has reverberated throughout the global trade and shipping industry. This article explores the multifaceted impact of these events on global supply chains and sustainability, analysing short-term disruptions and proposing potential solutions to address the challenges posed by this crisis.

Event Overview

The attacks on commercial ships in the Red Sea prompted seven of the largest shipping companies globally to reroute traffic away from the Red Sea, a critical shipping lane facilitating about 11 percent of global maritime trade volume annually. The strategic importance of the Bab el-Mandeb Strait, with its narrowest point at 25 km, cannot be overstated, as it serves as a vital link between Asia, Europe, and Africa, handling 30% of global container trade, including seaborne oil and LNG shipments. Cargo ships are being rerouted through the Cape of Good Hope, adding almost 30 to 40% of extra voyage time. 

Impact on Global Trade

The initiation of the Houthi bombings is marked by a sharp fall in both transit port calls and trade value at the Babel el-Mandeb choke point which falls within the range of Houthi heavy firepower while there is a simultaneous increase in the trade volume data for Cape of Good Hope.

In 2021 the Suez Canal blockage disrupted $9 billion/day trade for 6 days, costing $54 billion. The Red Sea crisis, lasting ~2 months, could incur potential losses exceeding $540 billion, excluding further costs like missed savings and emission damage. This loss will soar well beyond this estimate due to the rapidly escalating situation. To understand the impact in terms of volume, just on the morning of 21st December, 2023, 158 vessels were re-routed away from the Rea Sea aka 2.1 million cargo containers worth $50,000 per container totalling $105 billion.

Insurance coverage for ships taking the Swiss Canal route in early December was 0.07% but due to the increased risk in the region of a possible sinking or even hijacking the premium was increased to 1% of the cargo value. This prompted the shipping Companies to reroute their ships across the entire continent of Africa through the cape of good hope adding 89000 kilometres or 2 weeks additional sail time.

J.P. Morgan predicts these disruptions could inflate price index of essential goods by 0.7% and overall inflation by 0.3% in H1, 2024. Disrupted shipping and potential inflation rebound could keep core CPI near 3%, the price rise trickling into all sectors with a few months lag. Meanwhile, the energy markets are already spiking, pushing oil prices up as export routes of major oil producers flow via red sea. If extended, this conflict might also pose fuel procurement challenges for shipping companies to undertake their longer journeys across the Cape of Africa.

1. USA and Europe: Shipping rates from North Asia to the U.S. East Coast surged 137% to $5,100 for a 40-foot container, and to the West Coast by 131% to $3,700. The Red Sea and Suez Canal are also crucial for Europe's manufactured goods from Asia and energy imports from the Persian Gulf. Prices of Asia-Europe surged nearly five times. The Increased externality spending in international shipping for Europe alone is estimated at approximately $1 billion. Shipping costs to Europe from China more than doubled to about $7,000 from $3,000 in December 2023, posing a threat to its export-driven economy. 

2. OECD: 

The OECD countries, including UAE, Saudi Arabia, Bahrain, Kuwait, and Qatar, rely on the Red Sea route for exporting crude oil and LNG and are facing huge export shocks. Revenues from Suez Canal which are Egypt’s crucial source of foreign exchange has decreased to 40% from the beginning of the year compared to 2023, equivalent to a loss of approximately $300 million. 

3. Mediterranean 

The Mediterranean countries which only have ports in the Red Sea are at the risk of a potential regional war due to resource scarcity. Jordan, Sudan, and Ethiopia rely heavily on wheat imports transiting through the Suez Canal, with the Yemeni port of Aden supporting 90% of landlocked Ethiopia's trade. This already volatile region suffers from ongoing civil wars in Yemen, Sudan, Ethiopia, and Somalia with the recent crisis exacerbating humanitarian and economic crises as essential imports into their ports have stopped.

4. India 

For India the Red Sea route starts from ports of JNPT in Bombay or Chennai, heads west through the Arabian Sea, enters the Red Sea, and passes the Suez Canal into the Mediterranean Sea onwards to Europe. India's exports of basmati rice to Europe and import of energy are being impacted. According to think tank GTRI, the average container spot rates have doubled here since December 2023. Basmati rice exporters face a 233% hike in freight costs to $2,000 per 20-tonne container for destinations around the Red Sea. The route around Cape of Good Hope adds 10 days to India’s export time with our largest trade partner, USA and exporting to Europe take some additional 20-25 days. India is unlikely to face a crude oil shortage as the Houthis are not targeting Russian and Iranian oil tankers and West Asia oil which happens to be a big source of energy import passes via the Strait of Hormuz. But the reliance on this shipping route will certainly make our crude oil imports costlier- in January, India did not receive any crude oil from USA which is one of our top suppliers, according to data from market analytics firm Kpler. 

The increased Costs and Delays have an Economic Pillar aka the higher costs will impact medium scale businesses and consumers will face a reduced purchasing power as the price rise is caused by supply side rigidities The Social Pillar is that disruption in production, causes job losses and impacts livelihoods.

Impact on Supply Chain Management

1. Planning and Sourcing:

Disrupted Sourcing: Rerouting adds uncertainty and delays, making sourcing raw materials and finished goods more difficult and unpredictable.

Increased Inventory Costs: Disruptions and delays can lead to stockouts and product unavailability, impacting customer service and sales.

Impacting cash flow cycles: Merchandise arriving with a minimum 10-day delay results in correspondingly delayed cash collection, thereby creating liquidity constraints. This, in turn, restricts investment opportunities and may necessitate the diversion of funds from strategic initiatives to daily operational needs.

2. Procurement and Warehousing:

Higher Procurement Costs: Increased shipping costs and insurance premiums inflate procurement expenses for businesses. The longer transit time is absorbing at least 20% of the global container merchant fleet.

Warehouse Delays: Delays in deliveries can overload warehouses, impacting storage capacity and inventory management.

Operational Inefficiencies: The shift to longer routes disrupts established logistics flows, requiring adaptations and potentially impacting warehouse efficiency.

3. Logistics and Transportation:

Extended Lead Times: Rerouting significantly increases lead times, impacting production schedules, delivery commitments, and customer satisfaction.

Capacity Constraints: The surge in demand for alternative routes may strain available shipping capacity, leading to higher rates and potential shortages.

Multimodal Complexity: Businesses would need multimodal transportation (e.g., combining sea and land routes) in absence of alternatives, increasing logistical complexity and management needs. 

4. Opportunity Cost: The 15 days of additional cost could have been invested at the global interest rate of capital, say 6% increasing the capital base and innovation of shipping companies.

SDG Impact of the Crisis

Increased Emissions and SDG 13: Climate Action:

Rerouting significantly increases GHG emissions, hindering progress towards reducing shipping emissions by 50% by 2050 (SDG 13.2).

This directly impacts SDG 13.3, urging urgent action to combat climate change and its impacts.

Environmental Impact and SDGs 14 & 15: Life Below Water & Life on Land:

Longer journeys increase waste generation and potential spills, threatening marine ecosystems and biodiversity (SDG 14.1 & 14.5).

Conflict in the Red Sea further damages ecosystems and disrupts fisheries, affecting food security and livelihoods (SDG 15.1 & 15.6).

Challenges to Sustainability Goals:

The crisis jeopardizes progress towards achieving SDG 7: Affordable and Clean Energy, by hindering decarbonization efforts in shipping.

It threatens the achievement of SDG 12: Responsible Consumption and Production, due to increased pollution and unsustainable practices.

Solutions

Finding an alternative to the Red Sea route is a challenging task due to the saturation of the Cape of Good Hope route and the capacity limitations of air shipping compared to container shipping.

Route Optimization: Companies like Mediterranean Shipping, Maersk, and Evergreen can explore routes around the southern tip of South Africa to reach the East Coast and Gulf Coast of the United States. Significant investments in U.S. ports, including dredging and bridge elevation, are imperative to enable these import routes.

India's Alternate Trade Routes: India needs to focus on finding alternate sea routes to offset its heavy reliance on the Red Sea for energy imports. Utilizing ports like the deep-water port in Chabahar, Iran, can help diversify trade routes and reduce dependency on vulnerable regions.

Improving Port Efficiency in the region: Enhancing our port efficiency is crucial. This involves streamlining processes to quickly load and unload containers, optimizing terminal operations, and investing in infrastructure to facilitate smooth transportation of containers from ports to the wider transportation network.

Efficiency through Larger Ships: Potential efficiency gains by utilizing larger vessels as the size limitation of the Suez Canal will not be a limitation across the horn of Africa. Ships exceeding 400 meters in length could be deployed, carrying more cargo containers, up to 30,000 boxes, thereby maximizing shipment capacity.

Infrastructure Upgrades: To accommodate ultra-big container ships, ports need extensive upgrades. This includes dredging ports to deepen them, raising bridges to allow passage for taller ships, and installing new cranes and lay down areas to handle larger volumes efficiently.

By implementing these solutions, the efficiency and resilience of global supply chains can be improved, mitigating the impact of disruptions by the Red Sea crisis and ensuring the smooth flow of goods worldwide. 

Conclusion

 Increased costs tend to burden vulnerable populations, affecting living standards and access to essential goods because often developing countries like India are disproportionately affected by cost increases and delays, hindering their growth. The major learnings from this incident should be that reliance on single routes for trade causes vulnerabilities, hindering economic stability. It is important to build sustainable and diversified trade routes while focusing on optimizing the efficiency in the literal choke points aka ports. Disruptions also lead to increased transportation emissions and pollution which calls for an immediate substitution to clean sources of energy like solar and waves in the cargo shipping industry.ources of energy like solar and waves in the cargo shipping industry.