Planes, storage, and suppliers nearby: How businesses are dealing with the Red Sea crisis

The lethal rain of hostile drones and Houthi missiles on merchant ships in the Red Sea has turned the once dull but reliable maritime industry into a focus of uncertainty and unpleasant surprises. The industry is now battling unexpected delays due to route changes, financial overruns due to the increase in the cost of freight, and sky-high insurance against the possibility that cargo never reaches its destination. It is exactly the opposite of what businesses intend when choosing to transport goods by sea. Customer orders are placed months in advance so that they can be delivered on time by large container ships, which, although they are slower, cost less and have more cargo capacity than airplanes.

As this acute crisis turns chronic, the list of those affected continues to grow. The sources this newspaper consulted state that the magnitude of the detour ships are now forced to take in order to avoid the Suez Canal involves rounding the Cape of Good Hope and implies at least nine more days of travel. Yet, despite that, the impact on global economic growth and inflation has not been dramatic thus far.

“The first estimates suggest, for now, that the impact of the Red Sea crisis on inflation will be moderate, with an additional rise of a few tenths this year and an impact mainly focused on imported goods,” explains the chief economist for Europe at Oxford Economics, Ángel Talavera. The Bank of Spain has also revised its assessment of the shock. It believes that weak global demand and the absence of congestion in the logistics industry will prevent the traffic jams of yesteryear.

The key phrase, however, is “thus far.” If the U.S. and EU military missions do not achieve their objective of returning security to the area, the consequences could be very costly. At the moment, they already involve uncomfortable surcharges and hasty adaptations.

This is the case for automobile companies, whose supply chain is based on the “just in time” model, and who are less accustomed to storage. “Some auto manufacturers in Spain are being affected by delays in the components or raw materials necessary to manufacture their products, as well as an increase in costs by having to resort to air transport instead,” says the employer’s organization Sernauto.

To cushion the blow, crisis cabinets have been convened regularly. “As a tremendously flexible and resilient industry, car manufacturers are already adopting measures such as increasing stocks, readjusting transit times, advancing orders to suppliers, and drawing up contingency plans,” Sernauto adds.

Companies like Tesla, Volvo, and Michelin have already announced temporary stoppages in some of their production plants in Europe due to the late arrival of the materials they need. This will translate into thousands fewer cars being manufactured this year. For Tesla, this means making between 5,000 and 7,000 fewer cars and pausing production at one of its factories in Germany.

“Non-urgent orders are being postponed, the key variable is the duration,” say sources from the business association CEOE. Talavera agrees: “The precedent of 2021-22 tells us that there are risks of an exponentially higher impact if the crisis is sustained over time and the blockade begins to create disruptions in supply chains. Europe imports liquefied gas from Qatar, which passes through the Suez Canal, and a significant part of oil traffic could also be affected.”

More expensive freight and insurance

The large consumer association Aecoc warns that the impact is already significant in sectors such as food, textiles and fashion, hardware and DIY, and consumer technology goods, with freight rates that in some cases have become “300%” more expensive. This adds to the higher premiums requested by insurers, who sometimes even refuse to cover the risk of shipments.

Even so, the employers maintain that for now there will be no shortage of stocks, in other words, that shortages will be avoided. “In recent weeks, businesses have focused their efforts on anticipating purchases of raw materials, looking for new suppliers that are geographically nearer, and managing their supply through new routes and other means of transportation as an alternative to maritime transportation,” they say.

Since ships are spending more time at sea, and are thus unavailable for longer periods of time, this also means that it is difficult to find space for goods on board, despite the fact that the number of new vessels sailing has grown in recent months. “The direct impact is on the routes with Asia and the Middle East, but there is also an indirect impact on the route between Europe and America due to the shortage of containers and ships,” FIAB sources say.

The perfect storm will break with the Chinese New Year celebrations in February. The 16-day period historically involves a slowdown in production, limited transportation operations, and supply chain disruptions.

Problems in the Panama Canal (another global supply artery), which has limited the passage of ships due to a severe drought, have exacerbated the situation. “Container ships are also diverting to the ports of Los Angeles and Long Beach, and transporting those shipments across the U.S. to the East Coast. Air freight is increasing for urgent shipments, and manufacturers are experiencing delays,” explains Lisa Anderson, president of supply chain consultancy LMA Consulting Group.

Given the succession of unforeseen events in recent years, from the blockage of the Suez Canal by the Ever Given container ship to the supply crisis during the pandemic, Anderson believes that companies must be more proactive and take the initiative instead of just reacting when something happens and it is already too late. “That means establishing alliances and regional supply sources, better planning inventories, and being at the forefront of technological advances.”

Lesser impact than the pandemic

The investment manager Federated Hermes expects that the economic impact of the interruptions will be accentuated in the first two months of the year because cheaper trips contracted before the attacks will be replaced by current arrangements at higher rates. In context, the cost overruns are even lower than those of the most recent supply crisis. “The recent increases in container shipping rates are significant, but do not come close to the sharp increases in 2020 and 2021 during the Covid-19 pandemic.”

Then, as now, shipping companies were the big beneficiaries They multiplied their income and made increased profits accompanied by strong increases in the stock market. On the losing side of the Red Sea crisis, the insurer Crédito y Caución puts European manufacturers in first place. “They import a wide range of intermediate goods from the Asia-Pacific region, such as electrical equipment, high-tech goods, rubber and plastics, and chemicals and machinery. If the crisis continues, waiting times, prices, and congestion at ports are likely to increase. This may accelerate the return to a greater willingness to maintain higher inventory levels out of an abundance of caution,” the company notes.

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