In recent months, the Red Sea, a critical conduit for global commerce, has encountered significant disruptions due to escalating geopolitical tensions. These disturbances, impacting the flow of goods across continents, have notably increased container spot rates and insurance costs, signaling rising consumer prices for a broad spectrum of products.
John Catsimatidis, CEO of Gristedes and a significant figure in the retail and energy sectors, provides a critical perspective on the geopolitical actions affecting global retail prices. He highlights how geopolitical tensions benefit specific OPEC nations by influencing crude oil prices, which subsequently impacts the retail sector worldwide.
"The deliberate turmoil in key maritime routes aims to manipulate crude oil prices—a strategy that undeniably impacts global retail," Catsimatidis asserts.
Catsimatidis weighs in on the economic implications of disruptions in crucial maritime routes by addressing the concerns that retail sector CEOs face due to the fluctuating costs and uncertainties in the market."CEOs are apprehensive about future costs, particularly how prices might change 30 to 60 days from now. This uncertainty prevents them from reducing prices, as they aim to protect their earnings amidst a climate of insecurity and instability, which keeps prices elevated."
John Kartsonas, a shipping analyst and managing partner of Breakwave, highlights the contained impact on oil prices amidst Red Sea tensions, suggesting a moderated effect on delivered prices. This sheds light on the nuanced dynamics between shipping costs, oil prices, and their broader economic implications.
"The commoditized nature of that makes it easier to look for alternative sources in North and South America as well as West Africa. In this particular market, the short-term impact on freight costs has been very profound due to the supply/demand balance that has pushed the net profit of shipping companies to multi-year highs. Oil prices have been less affected, mitigating some of the increases in delivered prices, though. For the end users (i.e., fuel oil distributors), this is a pass-through cost to the consumer, but once again, the underlying oil price is a much more important element of the overall fuel cost than transportation, and thus price increases will be muted."
Vulnerable industries
Thomas Ewing, Director of Research at Altana, emphasizes the vulnerability of industries such as manufacturing, aerospace, and fashion, which rely heavily on the Asia-Europe trade lane.
“The disruptions caused by the Red Sea crisis will take a while to fully play out in the form of second-tier effects, inflation, and the supply chain “whiplash” that saw significant overproduction of key goods post-COVID. It’s also important to note that though the effects will be widely felt, the most serious initial impacts are likely to be concentrated in particular industries that are sensitive to Asia-Europe trade, such as manufacturing, aerospace, and fashion, given the fact that Europe-US and Asia-US trade lanes don’t depend as heavily on the Red Sea. Still, the global economy will be affected by second-tier consequences.”
Biggest losers from shipping disruptions are manufacturing and aerospace industries.
Manufacturing supply chains, characterized by their short lead times and complexity, are especially susceptible to disruptions. This has been evidenced by Tesla
"Across Europe, we see similar rates of dependence for manufacturing supply chains, including in the aerospace sector. For instance, according to the Atlas, one major European aerospace manufacturer displays a near-total reliance on Asian suppliers for its imports of aerospace components, such as engine parts, printed circuit boards, and electrical goods. This firm, in turn, is an important supplier of components to a large North American aerospace firm, as well as to the US Department of Defense and European Ministries of Defense, showing that second-tier disruptive effects will begin to spread through the global economy."
The spike in shipping costs could potentially exceed the inflationary pressures witnessed during the early days of the COVID-19 pandemic, posing a substantial threat to global supply chains.
Windward's analysis indicates a worrying decline in the number of container vessels navigating through the Red Sea's critical chokepoints, hinting at a shift in trade patterns that could have enduring repercussions on global supply chains. In a recent blog post, Ami Daniel, the company’s CEO, suggests that Suez Canal is no longer a viable route for shipping companies.
"We see almost a 25% decrease in vessels off the Northern entrance to Suez in December, and I fully expect a 35%+ decrease in January. Here's the math: To go through the Red Sea now you would need to pay: $1M-$3M of war risk insurance + $500K for Suez Canal passage + double crew wages + armed guards."
The fragile resilience of supply chains
Companies are encouraged to gain deeper insights into their supply networks to navigate the evolving landscape of regulatory compliance and risk mitigation effectively. Kartsonas observes that while the global supply chain has adapted post-COVID-19 by employing strategies like maintaining higher inventory levels, the Red Sea disruptions introduce new challenges.
“The resilience of the global supply chain has significantly improved since the pre-COVID era. The Just in Time (JIT) strategy, once popular for its efficiency, has been deemed too risky under recent geopolitical tensions. Companies can no longer rely solely on receiving products and materials on demand. In response, many businesses have shifted their strategies, now maintaining larger inventories than in the past. Consequently, the immediate effects of disruptions are less impactful. However, should the current disturbances, particularly those affecting the Red Sea, persist, we can expect an increase in the cost of delivered goods. This is primarily due to the extended sailing distances required, which lead to higher freight costs, largely because of increased fuel consumption. Ultimately, for goods traded along the East-West corridor, this means that delivered prices are likely to rise,” says Kartsonas.
These challenges could escalate costs for delivered goods, particularly affecting the East-West trade corridor where longer sailing distances mean increased fuel consumption and freight costs. Industry experts like Robert Khachatryan of Freight Right Global Logistics and Ethan Keller of Dominion discuss the direct implications for shipping timelines and operational costs.
“We're seeing a 20-30% increase in transit times as vessels are rerouted through the Cape of Good Hope, significantly elongating the journey to the US East Coast,” says Khachatryan.
The need for rerouting shipments and heightened security measures are anticipated to significantly increase shipping costs, which will likely be passed on to consumers. In response, there's a call for diversified supply chains, investment in real-time tracking technologies, and the development of contingency plans to manage geopolitical risks effectively.
However, Khachatryan also suggests that unpredictability of faraway shipping routes is already priced in to some extent, by global retailer preparedness.
“Retailers in the Middle East and East Africa are facing more direct and immediate challenges due to their proximity and reliance on the Red Sea routes. Global retailers, while affected, may have more diversified supply chains, allowing for greater resilience but not complete immunity to these disruptions.”
Keller suggests that “retailers may be compelled to reevaluate their procurement strategies in light of the uncertainties surrounding the disruptions in the Red Sea. Risks must be mitigated through the pursuit of alternative supply chain routes and supplier diversification."
Catsimatidis highlights the broader economic impact and the critical need for a coordinated response to safeguard global trade routes.
"Acknowledging the problem is the first step," he asserts, emphasizing the need for public and private sector collaboration to ensure the continuity of global commerce.
The situation in the Red Sea serves as a stark reminder of the fragility of global trade and the importance of proactive and strategic planning in the face of geopolitical risks. As the retail sector navigates these challenges, the lessons learned will be invaluable in developing more resilient and flexible supply chain practices. Beyond immediate disruptions, the crisis presents an opportunity for long-term strategic adjustments. Companies are now compelled to reassess their dependency on vulnerable trade lanes and consider alternative routes and suppliers.
