Red Sea Conflict Rattles Retail Supply Chain

Disruptions caused by Houthi rebel attacks in the Red Sea are surpassing the supply chain impact of the early COVID-19 pandemic, according to the leading ocean supply chain advisory firm Sea-Intelligence. 

Retailers are already feeling the impact, with companies like Tesla, Volvo, Michelin, Ikea, Next, and Crocs facing delays and disruptions in their supply chains.

The longer transit around the Cape of Good Hope is significantly affecting vessel capacity, marking the second-largest drop in recent years. The only event with a more substantial impact was the "Ever Given" incident in the Suez Canal in March 2021, according to Alan Murphy, CEO, Sea-Intelligence for CNBC. 

The decline in vessel capacity poses a challenge, with approximately 10% of the world's fleet currently inactive. Murphy suggests that adding vessels to the rotation after the Chinese New Year (Feb. 10) could help alleviate the imbalance. 

Iran-backed Houthi militants in the Red Sea have effectively blocked a major global trade route for most container ships, disrupting the transportation of various goods worldwide, claiming their attacks are in retaliation for Israel's actions against Hamas in Gaza. The Suez Canal, responsible for 10-15% of world trade, including oil exports, and 30% of global container shipping volumes, plays a crucial role in international commerce. Despite increased maritime security efforts by the US military and its allies, the attacks persist.

The conflict's duration is uncertain, with Honour Lane Shipping estimating six months to a year for the Houthi attacks in the Red Sea. This ongoing threat prompts a reevaluation of maritime commerce worldwide, urging stakeholders to prioritize the safety of crews and the security of cargo.

A Challenge for Retail

On a global scale, the conflict is intersecting with existing challenges faced by European and US retailers. The transport delays, now exceeding two weeks due to rerouted cargo ships, amplify the complexities of supply chain resilience. The surge in inflation and reduced consumer spending since the COVID-19 pandemic is pressuring retailers to prioritize cost reduction over faster product delivery.

Retailers are adopting various tactics to navigate the disruptions, including carrying more stock, diversifying suppliers, and reducing dependence on China. However, financial constraints limit the feasibility of alternative solutions, such as air freight. The pressure to maintain profitability leads many retailers to absorb higher transport costs rather than passing them on to consumers.

Fashion retailers, in particular, are adapting to the Red Sea disruptions by selectively using sea-air freight but remain cautious due to the significantly higher costs. Strategies include minimizing overstocking and reducing discounts, with some retailers planning to nearshore or source from suppliers closer to their markets. However, cost considerations and the challenge of remaining competitive make this shift challenging.

Ikea, for example, has declared that it will keep its existing prices intact despite the upheavals in international trade. While its parent company, Ingka Group, has invested more than US$1.1 billion to decrease prices worldwide, it has acknowledged the possibility of a profit decrease in 2024. 

The conflict’s effect has extended beyond retail, as energy markets and product tanker operators are experiencing a growing impact, with major players like Shell and BP suspending shipments through the Red Sea. Shipping analyst Bendik Folden Nyttingnes warns of potential tanker shortages, and recent diversions of LNG vessels raise concerns about energy supply disruptions.

The two Mexicans aboard the hijacked British cargo ship Galaxy Leader in the Red Sea, as of Nov. 19, have assured Mexican authorities that they are being treated well, are in good health, and conditions on the detained vessel are satisfactory. The Ministry of Foreign Affairs stated in a release that the honorary consul of Mexico in Sanaa, Yemen, visited the individuals to assess their well-being and health personally.