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INVERTO asks what can companies learn from the Red Sea crisis?

Published by , Editorial Assistant
Dry Bulk,

The Red Sea crisis has had a considerable impact on international shipping, with Red Sea shipping volume down by 50% compared to 20231. The crisis has forced many dry bulk shipping companies to avoid the Suez Canal route, the most important shipping route between Europe and Asia, and divert around Africa instead. This has increased journey times by almost two weeks.

If the crisis continues into March, when global trade becomes much busier, it could cause more disruptions across global supply chains. Worryingly, container carrier company Maersk has predicted that the disruption will last for at least two months.

Companies should see the current Red Sea blockade as a wake-up call to fundamentally review their supply chains to minimise the impact of risk and strengthen their competitiveness.

Recent spot price data

Charter prices for dry bulk vessels have increased over the last 12 months as the high demand for dry bulk transportation has not been matched by the supply of vessels. The Baltic Dry Index, which measures the cost of shipping dry bulk commodities, was 136% higher in the first week of February 2024 than at the same point in 2023. Recent spot price data shows that rates from the Far East to Northern Europe are set to rise by 8% by February, with a market average of US$5106 per Forty Foot Equivalent Unit (FEU), an increase of 235% since mid-December2. Routes from Asia to Europe have been most affected so far as journey times have increased since routes were diverted. Rates for the Shanghai-Rotterdam route jumped 115% in just two weeks over January. Spot rates for the Shanghai-Genoa route rose 114% over the same period3.

Without an end to the conflict in sight, companies risk paying higher prices and suffering losses to production – they are in real need of sustainable long-term solutions.

Steps companies should take to reduce the risk of further supply chain disruption

  • Monitor the situation: Companies should stay informed about changes to shipping routes and security measures and adjust their supply chain strategies accordingly. Companies can then make proactive and informed decisions and minimise the impact of the crisis on their operations.
  • Invest in risk management: Companies can invest in insurance, hedging and contingency planning to minimise supply chain disruption. Safeguarding against potential disruption in advance means companies can minimise the risk of costs rising and most importantly, maintain production.
  • Use technology like AI: Companies can leverage technology like blockchain, artificial intelligence and the Internet of Things (IoT) to enhance supply chain visibility, improve logistics efficiency and mitigate supply chain issues. For example, AI can be used to optimise logistics operations and predict the risk and impact of potential disruptions.
  • Collaborate with partners: Companies can work with their suppliers, logistics providers and other partners to develop contingency plans. It is important to be transparent on demand and stock levels, as well as discussing what shipments are urgent and any concerns about carriers hiking their sea freight pricing. Without strong partnerships, shippers should compare contracted conditions with daily spot rates to secure the best day-to-day result.
  • Diversify supply chains: Companies can reduce reliance on the Red Sea shipping route by diversifying their supply chains. For example, companies which are dependent on Asian suppliers could consider near-shoring. Shifting to local or regional markets could shorten delivery times and minimise the risk of transport delays.

Ensuring business continues during the Red Sea crisis

Wherever necessary to maintain production, buyers should negotiate alternative transportation options with their logistics service providers. Companies should also conduct a total cost of ownership analysis, which shows at what point an imminent loss of production justifies paying a higher transportation price, like air freight.

Shippers may also prioritise shipments based on a ‘turnover versus cost’ perspective and pass on the extra costs to customers if contracts allow them to. It is wise to work closely with customers to develop pricing models which allow prices to be adjusted if external trade issues arise.

Companies should use the Red Sea crisis as an opportunity to significantly improve their supply chains. Through cost analysis, strategic negotiations and adjustment of pricing structures, importers can minimise the impact of trade disruptions and strengthen their competitiveness for years to come.

  1. IMF, as of 21 January 2024, 10-day cumulative shipping volume.
  2. Xeneta.
  3. Drewry. Up to 4 January 2024, price for a Forty Foot Equivalent Unit.

Article provided by Theo Mizzi, Project Manager at INVERTO, part of Boston Consulting Group.

For more from INVERTO please follow the link to their website here.

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