Since October last year, the shipping world has been affected by attacks by Houthi rebels on merchant ships transiting the Red Sea. In this short article, I will try to give a brief summary of what has happened; what the implications are for the future of the shipping industry; and what steps you can take to mitigate the risks.
A brief summary
Since November last year, the Islamist military organization known as the Houthi, who control part of Yemen’s territory, have launched several attacks on merchant ships passing through the Strait of Bar El Mandeb, a chokepoint for the global economy as it serves as the southern maritime gateway to the Suez Canal. The Houthi claim that these attacks will continue as long as the Israeli forces proceed with their war against Hamas.
To avoid Houthi attacks, hundreds of commercial vessels have been rerouted to sail around South Africa. As of February 15, the number of ships passing through the strait has been reduced by more than half, according to Lloyd’s list. Needless to say, this situation has had serious consequences.
Impact on the shipping industry
The Red Sea crisis is yet another reminder of the importance – and fragility – of global supply networks. The attacks have already had a ripple effect on supply chains: As carriers have rerouted several vessel services, transit times and ocean shipping rates have increased significantly. In turn, some shippers, such as Ikea, have already reported delays and restrictions on certain products. Carriers that insist on using the Red Sea route have seen a significant spike in insurance premiums and security costs. These events add another layer of uncertainty to an already troubled shipping industry, on top of the Panama Canal drought and last year’s U.S. West Coast port strikes.
But what looks troubling for the ocean shipping industry can prove beneficial for air cargo. If major ocean carriers don’t go through the Red Sea, with all its knock-on effects, some shippers may be willing to pay for the predictability of air freight to mitigate the impact of the current ocean freight disruptions.
While the overall supply chain outlook for 2024 remains murky due to the high level of market uncertainty, the disruptions and challenges may be good for airfreight’s share of global trade.
Even though it’s too early in 2024 to confirm this trend, the first few weeks of January saw a 10% year-over-year increase in air freight volumes due to shipper concerns. And in some specific hubs with increasing port delays, such as South Africa’s Durban terminal, the trend shows that for time-sensitive commodities and in cases where the risk of production stoppages is heightened, having an efficient air option has become invaluable.
Of course, this doesn’t guarantee a long-term impact on air freight. Once the initial jitters and uncertainty subside, stability most probably will return as shippers simply accept that ocean freight may just take two weeks longer, reducing the need for airfreight.
In addition to that, market analysts such as shipping consultancy firm Drewry say that the global ocean freight market is so oversupplied that it has ample room for disruptions such as this, which will eventually bring rates back down.
Actions you can take
Needless to say, these kinds of scenarios are far from simple to analyze, let alone to act upon. And unfortunately, nothing seems to indicate that the situation will be resolved in the short term. Here is some personal advice, in increasing order of complexity:
- Don’t rush your decisions: Yes, the situation is unstable, but think twice before you take any action that could disrupt your daily processes and operations. You could end up doing more harm than good. Unless you’re dealing with perishables or risking production shutdown, perhaps the best course of action is no action at all.
- Review your air freight rates: If you are truly considering switching to air freight or significantly increasing your cargo volume, I would recommend taking a closer look at your shipping rate contract, as there are endless volume increase clauses that you can take advantage of.
- Trust in an experienced freight partner 😉: Air freight rates can be astoundingly complex. Coefficients and variables that are quite beneficial for one shipper profile, may prove terribly expensive for another. So if you’re thinking about renegotiating or expanding your shipping contract, it wouldn’t hurt to get some additional help.