The Red Sea crisis and its impact on global supply chains for 2024 and beyond

On October 19, 2023, the world witnessed the commencement of what would later be recognized as the Red Sea crisis. By late November of the same year, the repercussions of this crisis, marked by heightened geopolitical tensions, security concerns, and escalating conflicts, had transcended its origins, casting a shadow over global supply chains.

As shipments were halted and vessels diverted to navigate the troubled waters, the ripple effect of these decisions on the interconnected global trade network became increasingly apparent.

Fast forward to 2024, and the Red Sea crisis continues to send shockwaves through the intricate web of maritime trade routes, leaving an enduring impact on industries reliant on global shipping.

In this article, Infor Nexus, a leading authority in maritime shipping, delve into the data behind these decisions and explore the far-reaching consequences on global trade, including shipment lead times, transportation costs, and the overall stability of supply chains.

Unravelling the Red Sea crisis

At the heart of the Red Sea crisis lies a complex interplay of geopolitical factors involving key players in the region. Competing interests, historical grievances, and regional power struggles have collectively created a volatile environment, significantly affected maritime trade routes and posed substantial challenges to the smooth functioning of the global economy.

The Bab el-Mandeb Strait, a narrow passage connecting the Red Sea to the Gulf of Aden, is a pivotal focal point of the crisis. With around 15% of global trade and an estimated 30% of global container traffic passing through its waters, the Bab el-Mandeb Strait remains critical for shipping goods. Yet, this vital artery for global trade has witnessed heightened piracy, territorial disputes, and geopolitical tensions, raising concerns about the security of this crucial maritime route.

The global supply chain disruption

The Red Sea crisis has sent shockwaves through global supply chains, continuing to affect industries that rely heavily on maritime trade. Here are some ways in which the crisis has disrupted the flow of goods worldwide:

1. Shipping delays

Data from Infor highlights a notable surge in transit times for shipments attributed to the Red Sea crisis. The most significant delays are evident in shipments originating from Asian ports destined for Western Europe and the East Coast of the United States. Particularly affected are routes from Asia to Germany, experiencing a remarkable 55% increase in transit times, resulting in an average delay of 12 days. Similarly, shipments bound for New York and other East Coast ports are grappling with delays of up to 11 days. These disruptions significantly impact just-in-time inventory systems and cause substantial upheaval in the supply chain schedules of numerous organizations.

2. Rerouting

Faced with risks in the Red Sea region, companies are reassessing shipping routes with major container shipping companies, including Maersk, Hapag-Lloyd, and MSC. Some have opted for a temporary suspension of their Red Sea services, choosing the longer, but safer route around the Cape of Good Hope in South Africa. However, this switch adds extra transit time and hundreds of thousands of dollars in fuel costs to the supply chain.

Delays due to rerouting are further compounded by the ongoing drought in the Panama Canal that has affected the region for months. Lower water levels have forced the Panama Canal to drastically reduce the number of daily passages, with predictions for February going as low as 18 vessels per day. This sharp drop will undoubtedly have a profound impact on the industries reliant on the canal’s smooth flow of goods. Subsequently, shippers are forced to decide to wait at anchor for a slot that may take days or even weeks to arrive, either rerouting their vessels and accepting the increase in cost and transit time or choosing to move their goods overland.

3. Increased costs

Uncertainty surrounding the security of the Bab el-Mandeb Strait has resulted in heightened insurance premiums and increased costs for shipping companies. These increased shipping costs have a significant ripple effect, which is expected to slowly seep into the economy and affect the end consumer, potentially damaging an already fragile recovery for the global economy.

According to the Economic Times, Marine war risk premiums have surged nearly fiftyfold since the onset of the conflict, reaching levels as high as 1% of the ship's value. However, a more common rate appears to be around 0.7%. This means a vessel transporting goods valued at $100 million would incur an additional $700,000 in premiums for the few days required to traverse the Red Sea region.

The other side of the coin is the extra fuel it takes for a shipper if they choose to avoid the Red Sea and reroute around the Cape of Good Hope, adding thousands of dollars to the cost of a journey, all of which adds up. The longer this disruption to normal activities continues, the higher those costs will rise, and retailers must either absorb these extra costs or increase prices for the end consumer to keep profit margins steady.

4. Supply chain resilience and redundancy

The crisis underscores the importance of building resilience and redundancy in global supply chains. Companies are now re-evaluating their dependence on specific routes and suppliers, seeking alternative options to mitigate risks associated with the Red Sea region, with the least impacted organizations being those that rely less on global sourcing and are insulated from the crisis due to sourcing more domestically.

For many industries, the Red Sea serves as a critical transit point, and any disturbance in the flow of shipments can have widespread ramifications on global markets. The rise in costs also impacts retailers that rely heavily on global sourcing. At the same time, manufacturers and chemical companies throughout Western Europe and North America struggle to get the parts and goods they need due to the ongoing crisis.

Resilience through visibility and data

In conclusion, these situations are simply the latest in a long line of events that underscore a broader issue within global supply chains, demonstrating how critical components can unexpectedly face disruptions. It re-enforces the increasing importance of the advanced supply chain visibility and predictive insights into estimated time of arrivals (ETAs) that solutions like Infor can provide.

The Red Sea crisis is a stark reminder of the interconnectedness of global supply chains and the need for adaptability, resilience, and strategic planning to withstand supply chain disruption.

By leveraging data intelligence from the world's largest global supply chain network, Infor provides state-of-the-art visibility and greater insight, aiding businesses in navigating through these troubled waters and transforming from a reactive to a proactive supply chain.

 By James Illidge, Product Marketing & Strategy, Infor.