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Editor in Chief Mohamed Wadie

World Bank: Prolonged Red Sea Attacks Leads to Supply Chains Crisis

Sun 28 Jan 2024 | 11:42 PM
Taarek Refaat

Experts at the World Bank said that in the near term, the global container shipping industry is likely to absorb the shock to shipping capacity due to attacks on ships in the Red Sea due to generally weak demand in the months of January and next February.

The experts said in a blog they published on the World Bank website that if the attacks continue into next March and April, a time when global trade is witnessing a seasonal recovery, restrictions on shipping capacity could lead to a supply chain crisis like the one that occurred in 2021-2022.

The blog added that this crisis occurred when container shipping was unable to support the recovery of international trade starting in late 2020.

Port closures, due to the outbreak of the Corona pandemic and the shortage of employees and workers in them, led to ships continuing to wait days or weeks to unload their cargo, which led to a decrease in the number of ships available to transport goods.

The blog added that competition for available shipping space on ships has led to a sharp rise in spot freight rates; The increase reached eight times on shipping routes between Asia, Europe or North America compared to their prices in 2019.

Experts said the source of today's supply chain stress varies, but the result may be similar. Major shipping companies, including Maersk and Hapag-Lloyd, have suspended operations through the Suez Canal to avoid the Red Sea route and are rerouting ships around the Cape of Good Hope, which adds 3,000 to 3,500 nautical miles (5,500 to 6,500 km) and seven to 10 sailing days to a typical voyage between Europe and Asia.

They added that the additional distance could accommodate between 700,000 and 1.9 million standard equivalent containers (twenty-foot equivalent shipping units) of shipping capacity, according to estimates.

The additional costs of the trip around the Cape of Good Hope – which include up to $1 million in fuel per round trip – are reflected in higher freight rates.

Maersk is adding a “transit disruption surcharge” of $200 per TEU to its books (regular freight and spot freight contracts) for voyages between East Asia, Northern Europe, the Mediterranean and the East Coast of the United States, according to the blog.

This is in addition to a “peak season surcharge” of $300 and $1,000 per TEU.

Mediterranean Shipping, another global container shipping company, also announced that it will impose an “emergency adjustment fee” of $500 per TEU on shipments from Europe to Asia and the Middle East.

Spot freight rates have risen further, with the price of a trip from Asia to Europe jumping to more than $3,000 per 40-foot container, a three-fold increase from the lowest rate recorded in 2023 (about $1,000).

This could mean - according to experts - that exporters in Asia are once again competing for available shipping space in anticipation of major disruptions to supply chains.

Fortunately, this January and next February are seasonally quiet months for shipping, so current capacity may be sufficient to handle the longer route in the coming weeks.

But if the naval attacks continue until next March, they could have a significant impact on global trade and global value chains again.