Red Sea crisis fuels shipping costs, delays, inflation

Attacks on ships in the Red Sea continue to push ocean freight rates higher, triggering warnings of inflation and delayed goods.

To avoid strikes by Iran-backed Houthi militants based in Yemen, carriers have already diverted more than $200 billion in trade over the past several weeks away from the crucial Middle East trade route, which, along with the Suez Canal, connects the Mediterranean Sea to the Indian Ocean.

This has created a multiple-front storm for global trade, according to logistics managers: Freight rates increasing daily, additional surcharges, longer shipping times, and the threat that spring and summer products will be late due to vessels arriving late in China as they travel the long way around South Africa’s Cape of Good Hope.

“The supply chain pressures that caused the ‘transitory’ part of inflation in 2022 may be about to return if the problems in the Red Sea and Indian Ocean continue,” said Larry Lindsey, chief executive of global economic advisory firm the Lindsey Group. The U.S. Federal Reserve and other central banks have been battling high inflation with rate increases, although it’s likely the Fed will start cutting rates soon.

“Neither the Fed nor the ECB can do anything about them and will likely ‘look through’ the inflation they cause, potentially leading to rate cuts despite somewhat heightened inflation pressures,” Lindsey said.

The persistent violence against commercial ships drew a stern warning from the United States, Japan, the United Kingdom and nine other nations on Wednesday. “The Houthis will bear the responsibility of the consequences should they continue to threaten lives, the global economy, and free flow of commerce in the region’s critical waterways,” the countries said in a joint statement.

In the meantime, about 20% of vessel capacity isn’t being used due to a massive drop in manufacturing orders, according to industry experts. Instead, ocean carriers continue to cut their sailings while tight capacity and longer travel times are fueling rate increases.

Rates for freight traveling from Asia to northern Europe more than doubled this week to above $4,000 per 40-foot-equivalent unit (container). Asia-Mediterranean prices climbed to $5,175 per container. Some carriers have announced rates above $6,000 per 40-foot container for Mediterranean shipments starting mid-month, with surcharges ranging from $500 to $2,700 per container.

“Given the sudden upward movement of ocean freight pricing, we should expect to see these higher costs trickle down the supply chain and impact consumers as we move through the first quarter,” said Alan Baer, CEO of shipping firm OL-USA. Companies, reflecting lessons they learned during the supply chain chaos of 2021-22, will adjust prices sooner rather than later, he added.

Rates from Asia to North America’s East Coast have risen by 55% to $3,900 per 40-foot container. West Coast prices climbed 63% to more than $2,700. More shippers are expected to start avoiding the East Coast and favor the West Coast ports. Likewise, rates are on track to rise again starting Jan. 15 due to previously announced increases.

“This is a big deal as it’s been mostly the fall in goods prices that have eased the inflation strain,” Peter Boockvar, investment chief at Bleakly Financial Group, told CNBC. “And while the battles going on in the Red Sea could end at any moment if the war in Gaza ends, it’s a reminder to the Fed that they can’t get complacent with their inflation fight if they don’t want to repeat the 1970s.”

Diversions from Egypt’s Suez Canal, which feeds into the Red Sea, are hurting capacity. Rerouting vessels around the Cape of Good Hope adds two to four weeks to a round-trip voyage, according to Honour Lane Shipping (HLS). Ocean alliances need more ships on each Asia-East Coast route to maintain an efficient network schedule.

“Some 25%-30% of global container shipping volumes pass through the Suez Canal (mainly on Asia-Europe trade), and it is estimated that widespread re-routing around Africa could reduce effective global container shipping capacity by 10%-15%,” said the note. “While the disruption continues, carriers may have to reduce the number of port calls to offset the impact of longer routes.”

The longer travel time could also delay the arrival of spring goods that are traditionally picked up before the Chinese Lunar New Year, set for February, when factories close and employees go on vacation. Containers that were supposed to arrive on the East Coast in December are arriving now, according to logistics managers. Items include spring and summer clothing, pools, pool supplies, Easter products, patio furniture, and home and garden products.

North American East Coast ports in December, amid the Houthi attacks, “lost” several calls, which were instead pushed into January, according to data from maritime intelligence firm eeSEA. The vessels will instead arrive in January and February.

So vessels are not only late in dropping off their containers to their final destinations, they’re also late getting back to Asia to load containers. As a result, HLS is urging clients to book their container space four to five weeks in advance to secure a spot.

It’s reminiscent of what freight companies experienced during Covid’s earlier days.

“We used to book out four to six weeks out during Covid,” said OL-USA’s Baer. “During Covid, we had way too much cargo, and all the ships were full, so you have to forecast your bookings out. Now while there is vessel capacity, the vessels are late, so it’s a scramble to make sure you get your container on that vessel.”

Ocean carriers are also expanding land-freight services for those using West Coast ports intead of the East Coast. This is a similar strategy deployed by Hapag-Lloyd during Covid, when it offered clients service across land to the West Coast from the East Coast because it was faster.

These diversions in trade will create opportunities for West Coast railroad companies, Union Pacific and BNSF, a subsidiary of Berkshire Hathaway. The extra containers will also be a boost for trucking companies that also service those ports.