Source: Supply Chain Dive
Date: 22nd December 2023
Using alternative routes like the Cape of Good Hope not only means longer transit times but higher freight costs. Here’s what shipping experts had to say.
Shippers are facing yet another disruption as the year comes to an end, as the Suez Canal becomes a less viable route to move cargo.
Earlier this month, attacks on vessels traveling to the shipping channel through the Red Sea led major carriers to reroute ships or halt transit. And while an international operation is being coordinated to help secure safe transit for commercial vessels, logistics managers now find themselves assessing contingency plans until the situation is resolved.
Supply Chain Dive spoke to several shipping and logistics experts about some of the concerns shippers may have given the current situation. Here are five questions and answers that may help shippers decide where, how and when to reroute their cargo.
1. How are carriers responding?
Carriers are acting fast given the potential of Houthi-led attacks on cargo ships.
Beginning Nov. 19, about 55 vessels were rerouted through the Cape of Good Hope route, “which is a significantly low number when compared to the number of 2128 vessels transited the Canal in that period,” according to the Suez Canal Authority. In 2022, 23,851 vessels transited the Suez Canal, with an average of 68 ships per day.
Longer transit times are expected in the medium term for shipments that have not departed. How much depends on what the vessels’ original routing was and when the vessel diverted. Keep in mind that some of these vessels were already diverted away from the Panama Canal.
Actions from ocean carriers in response to the vessel attacks
2. What alternatives exist?
Shipping lines can use the Cape of Good Hope in South Africa to bypass the Suez Canal.
However, the safer alternative for shippers comes with extra costs and transit times. A trip from Singapore to Rotterdam around the cape is an extra 3,500 kilometers by container ship.
The extra fuel will cost an additional $500,000 to $1,000,000 and shippers have the inventory on their books [for] an extra 20-30 days.
On Asia to U.S. East Coast route, shippers could also switch modes, leveraging truck and rail intermodal moves from the U.S. West Coast.
However, other experts pointed out these are also imperfect solutions, as shipments will be delayed in either case.
One of the reliable sources said their plans include a combination of sea and air solutions via Colombo, Dubai or the U.S. West Coast, in addition to traditional airfreight solutions and expedited inland services once cargo arrives at port. Meanwhile, another reliable source said the company was encouraging customers to use a sea-to-air solution, where eastbound shipments could arrive from Asia by sea to Dubai, and then transit by air.
This allows for a faster transit time compared to sea freight and a more sustainable and cost-effective solution than direct air freight.
3. What could happen to ocean freight rates?
Rates will almost certainly increase from Asia to Northern Europe.
Ocean carrier ZIM, which began diverting its vessels that normally use the Red Sea last month, increased rates for its Asia to Mediterranean service. Now, shippers must pay between $3,300 and $3,400 per forty-foot equivalent unit for the service.
Spot rates are also increasing already. Rates from Asia to the U.S. East Coast and West Coast have already increased slightly and more are likely to come, referencing Drewry’s WCI Index. However, the rates remain comparable to levels seen earlier this year.
So while rates are rising, experts said readers should not expect them to increase as severely as they did the last time the Suez Canal was blocked for a prolonged period, in 2021.
Because of the excess capacity available to address the disruption – something that was not the case during the Suez Canal blockage in 2021 – it is possible that the industry will avoid extreme rate spikes like those seen during the pandemic.
4. What goods could be most affected?
During the 2021 blockage, experts told Supply Chain Dive nearly everyone may be affected in some way, given the size of the trade route. And companies like Walmart and Ikea, as well as the automotive and technology industries, may be particularly exposed.
The Suez Canal is a critical artery for the Asia-Europe trade, which represents 12% of vessel routes and 30% of global container traffic, according to a retired U.S. Coast Guard captain who wrote about the topic in the U.S. Naval Institute’s Proceedings Magazine issue.
As a result, experts said the Asia to Europe trade lane will likely be most affected, as it is the shortest sea route available.
“The market anticipates that especially in Europe which is on the receiving end of import containers from the Middle East, India, Southeast Asia and China, that container scarcity will lead to an increase in container prices and the market,” the CEO and founder of Container xChange said in an analysis shared with Supply Chain Dive.
In the U.S., goods sourced from Asia – such as apparel, toys and electronics – and shipped to the East Coast may also be affected. Exports from the East Coast, like grains, liquified petroleum gas and liquefied natural gas, may also be affected.
However, any commodity that can be shipped using alternative modes, such as air, may be safe from severe disruption. The list is small, though, and “only the most expensive goods that move by air or domestically produced and consumed goods or goods that can move internationally by truck will remain unaffected.”
5. What else should shippers know?
Shippers considering shipping from Asia to the Gulf Coast need to be aware that the trade lanes may also be subject to delays due to ongoing drought restrictions at the Panama Canal.
The Panama canal is still experiencing a drought which is resulting in fewer vessel slots being available on a daily basis. The number of slots is expected to decrease going into February, so the Panama delays could increase over the next 6-8 weeks.
Besides tackling alternative shipping routes, shippers should also look into material sourcing strategies.
This includes multi-sourcing (using multiple suppliers for a certain material in case one of the suppliers is unavailable) and sourcing materials in-region (using sources that are physically closer to the manufacturing hubs).
In addition, shippers should be wary of their insurance premiums.
While there are some small niche carriers that can offer shippers an Asia to Mediterranean service route using the Suez Canal, shippers need to realize this comes with a risk.
There is a risk of losing cargo and shippers need to read insurance premiums extremely carefully to see if they are covered under such a situation where the risk is this obvious. It would not be surprising if some might find it impossible to get their cargo insured at all.