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Logistical Workarounds in Red Sea Shipping Result in Extra Expenses and Time Delays for Suppliers and Retailers
Economy Middle East

Logistical Workarounds in Red Sea Shipping Result in Extra Expenses and Time Delays for Suppliers and Retailers

Basic Fun, the company that makes Tonka trucks and Care Bears for Walmart and other stores, has a team in charge of shipping these products by sea. They are currently working quickly to find alternative routes for their cargo, after recent attacks on ships in the Red Sea.

According to sources in the logistics industry, suppliers for major companies like IKEA, Home Depot, Amazon, and other retailers are facing a significant shipping challenge due to the COVID-19 pandemic. This has caused disruptions in global supply chains and businesses are struggling to adapt.

According to CEO Jay Foreman, Basic Fun, a company located in Florida, typically sends its toys to Europe from their factories in China using the Suez Canal. This is the most efficient route for transporting goods between these locations, as stated in a phone interview from his office in Hong Kong.

Approximately 33% of the world’s container ship cargo travels through this trade route. It is estimated that diverting ships around the southernmost point of Africa will result in an additional cost of $1 million in fuel per round trip between Asia and Northern Europe.

The Houthis, a group from Yemen, have disrupted shipping plans in the Red Sea through their use of drones and missiles. This is in support of the Palestinian group Hamas, who is currently engaged in combat with Israel in Gaza.

Basic Fun is currently operating during the holiday season to ship toys from China to ports in the U.K. and Rotterdam using a longer route.

Some goods originally intended for ports along the U.S. East Coast are being redirected from the Suez Canal to the drought-affected Panama Canal, and others are being rerouted to the West Coast via a direct path across the Pacific Ocean.

According to Foreman, rates for certain China-U.K. freight have increased by over double to approximately $4,400 per container since the start of the Israel-Hamas conflict in October. This will result in longer delivery times and higher costs.

The situation at the Suez Canal continues to evolve rapidly, and shipping companies MaerskMAERSKb.CO and CMA CGM are taking steps to resume voyages with military escorts in the Red Sea.

The most significant effect is expected to occur within the next six weeks, according to Michael Aldwell, the executive vice president of sea logistics for Kuehne + Nagel KNIN.S in Switzerland.

Aldwell stated that it is impossible to quickly and easily restructure global shipping methods. Due to this, he predicts that there will be a lack of available vessel space, resulting in stranded empty containers that are necessary for China’s exports being placed in incorrect locations. This is also anticipated to drive up short-term transportation costs significantly.

Based on calculations by Xeneta, the cost of shipping a 40-foot equivalent unit (FEU) container from the Far East to the Mediterranean after escalation is $2,320, compared to $1,865 per FEU in early December. Similarly, the cost of shipping an FEU from China to the United Kingdom after escalation is $1,625, while it was $1,425 per FEU in early December.

Peter Sand, chief analyst at Xeneta, stated that the rates mentioned do not cover additional risk surcharges and “Emergency Recovery Cost,” which can range from $400 to $2,000 per FEU.

Scramble for space

According to data from Kuehne + Nagel, as of Wednesday, approximately 20% of the worldwide container ships have been redirected due to the recent attacks in the Red Sea. This accounts for 364 large vessels that can hold a total of 2.5 million standard-sized containers.

Japan’s two biggest shipping companies, Mitsui O.S.K. Lines (9104.T) and Nippon Yusen (9101.T), announced that their ships bound for Israel are avoiding the Red Sea region. The companies are closely monitoring the situation and determining their next course of action.

According to Anders Schulze, the head of ocean business at digital freight forwarder Flexport, vessel owners have already started limiting the amount of cheaper, contracted space they set aside for their customers.

In one case, he mentioned that a client who transports five containers per month instead of the agreed upon ten may only receive the contracted rate for those five containers. The remaining five would be charged at higher spot market rates.

According to logistics experts, there is currently a rush to secure storage space before the early February deadline in order to ship goods out of China before factories shut down for the extended Lunar New Year festivities.

Alan Baer, CEO of OL USA, stated that all bookings from outside of China must be confirmed again. The dates and routing may be subject to change. OL works with freight shipments for their clients and has agreements with ship owners, making them a part of the race to secure space on ships.

Smaller shippers are the ones most likely to be pushed out.

Marco Castelli, the owner of an import/export company in Shanghai, has been attempting to reschedule the delivery of three containers filled with machinery parts made in China to Italy. The shipments were originally canceled due to the ongoing crisis.

He stated that if you transfer my circumstances to a large corporation, you will understand what is happening.

The manager at Basic Fun, who intends to ship around 40 containers before the Lunar New Year, stated that the company’s agreements with clients do not allow for reimbursing the additional cost. “The cost has been established. [The majority of suppliers] will have to bear the burden of these expenses.”