The first major supply-chain concern of 2024 is here—and it has been since last year.
Since November 2023, Houthi rebel groups have carried out around two dozen attacks against commercial shipping vessels in the Red Sea, jeopardizing a critical trade route, destabilizing the flow of goods, and upping shipping times.
The attacks, which the group claims are an attempt to target vessels tied to Israel, show little sign of stopping. After the US and UK recently launched retaliatory strikes on Houthi targets, a Houthi official warned they’ll “pay a heavy price and bear all the dire consequences” for the move.
In light of the attacks many major shipping groups, including industry leader Maersk, which controls around one-sixth of international container shipping, have rerouted vessels. Now, many shipping companies are relying on the Cape of Good Hope, which takes significantly longer, adding a possible three weeks to shipping times, per Reuters.
“The Red Sea and Suez [Canal] are essentially shut down,” Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, told CFO Brew. “It’s just not safe for any vessel.”
All of this has led to a supply-chain crisis both dire in its immediate urgency and ominous for the challenges it could later pose for shipping prices should attacks continue.
To Gold, the attacks and subsequent supply-chain disruptions and pricing dilemmas also highlight a message that’s been clear since before the pandemic: The supply chain is firmly a CFO issue now.
“This continues to highlight the complexity and the challenges that we see within the supply chain—that there’s always something that has an impact,” he said.
How slowdowns impact pricing. Gold said the attacks have not had an immediate effect on pricing…yet. “Early on, when the attacks first started…you didn’t see the immediate increase in rates and charges because I think everybody was just trying to figure out what was happening, what the response was going to be,” he explained. “The longer this has gone on, you see those prices start to tick up once again, especially on the spot market.”
“There’s a lot of different cost elements that go into [pricing] when you’re making your negotiations and contracts with your ocean carrier,” Gold explained, noting that high freight rates during the pandemic, for example, were fueled by “surges and congestion, and everything else. It’s the rates themselves, the cost of the fuel, labor costs. All that adds up.”
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For a time, he notes, shipping prices had come down closer to pre-pandemic levels. “Now, because of the disruptions, we’re starting to see rates start to increase, especially on the spot market,” he continued. The rerouted vessels and longer transit times mean “more money, more fuel, and additional fees that are now being charged for a variety of reasons,” he said. “And those insurance costs are going up as well because the security aspect of this is adding to that, so you’re seeing insurance rates skyrocket as well as the freight rates.”
Gold consults and works with retailers, many of whom “have year-long contracts [with shipping companies] that are set as far as rates go and any additional surcharges that can be applied,” he explained. “The issue though, is that we’re now coming into the contract negotiation season, which is starting very soon.”
“Those that are under the yearly contract are able to have discussions with their carriers and mitigate the impact of cost increases,” he explained. “But once those contracts are over, and they get into the negotiating season again, that’s when you can see some of those increases.”
How will shipping prices be impacted in 2024? Where things go from here is anyone’s guess in Gold’s eyes—in large part because it’s still unclear how long the attacks may continue.
“It’s all the uncertainty that folks just don’t know at this point in time,” he said. “What a lot of companies are doing, especially from the retail side, [is] they’re working very closely with their carriers to understand, from their perspective, what’s going to happen over the next few weeks or months. Things could change, but it’s unclear.”
One crucial task for any retailer or cargo owner, in Gold’s opinion: Ensure you understand the full extent of the situation by “continuously asking the carriers, while they’re looking to increase their costs…‘Do these charges actually line up with what the true costs are?’...Retailers do this all the time, so they’re certainly working closely with their providers, and trying to understand what the actual costs are, and what increases could be coming down the pike.”
“This is why companies now are spending so much time focusing on diversification and resiliency as key elements of how they’re operating their supply chains,” he added. “That’s what folks want to make sure of. The supply chain certainly has remained at the C-suite level for quite a while now.”