Turmoil in the Middle East and its Impact on Shipping

WERC Staff - Jun 10 2024
Published in: Mobility
| Updated Jun 11 2024
Conflict in and around the Red Sea, as well as challenges in the Panama Canal, have forced shipping firms to reroute vessels to longer and more expensive journeys, raising the cost of doing business globally. 

On 7 October, Hamas launched an attack on Israel, which led to Israel’s military response in the Gaza Strip. This escalation subsequently involved other regional groups, including Hezbollah in Lebanon and the Houthis in Yemen. On 19 November, the Houthis hijacked a commercial ship in the Red Sea. The group claimed that the ship was Israeli, and it was taken to a port in Yemen. Israel said the ship was not theirs, and no Israelis were among its crew.

The Houthis in Yemen have increased their military activities, launching repeated drone and missile attacks on ships in the Red Sea and other areas since November 2023. The group claims these actions are in solidarity with Palestinians and in opposition to Israel’s conflict with Hamas. This has forced shipping firms to reroute vessels to longer and more expensive journeys around the Cape of Good Hope in South Africa, raising the cost of doing business globally.

According to London-based shipping services company Clarksons, the number of container ships at the mouth of the Red Sea en route to or from the Suez Canal decreased by 90% in the first week of January 2024 compared to the same period the previous year. The number of container ships diverting from the Red Sea to travel round the Cape of Good Hope on 9 January was more than double the total as recently as 21 December. Meanwhile, ships moving cargo between China and the U.S. East Coast had already been avoiding the Panama Canal due to drought, so diversions around southern Africa are further impacting supply chain challenges.

The New Algebra of Shipping Goods

According to the U.S. Energy Information Administration, a typical voyage from the Persian Gulf to the Amsterdam-Rotterdam-Antwerp petroleum trading hub (ARA) through the Suez Canal takes 19 days. If the ship takes the Cape of Good Hope route, it takes nearly 35 days to reach the ARA. Longer routes put upward pressure on freight rates because of fuel costs and fewer available ships. In addition to adding to fuel costs, a longer voyage requires more ships to maintain the same delivery schedule, and fewer available ships contribute to higher tanker rates and costs. 

As of early January, average worldwide costs to ship 40-foot-long containers have nearly doubled since late November, according to London-based Drewry Shipping Consultants. The spot-market price to move containers between China and Rotterdam in the Netherlands reached $3,577 in the week ending 4 January, a 115% increase from the week before. “What every shipper is trying to figure out is if the current proposals are in line with the carrier’s added costs and not simply a move to offset softer rates in other lanes or raise rates across the board,” says Colin Yankee, chief supply chain officer at Brentwood, Tennessee-based retailer Tractor Supply.

For those maintaining traditional routes, there’s the burden of higher insurance costs. War risk coverage is often required for vessels going into areas designated as high risk. The cost to insure container ships or tankers transiting the Bab al-Mandeb strait off Yemen en route to the Suez has jumped. As of late January, marine war risk premiums surged around fiftyfold since before the war, to as high as 1% of the value of the ship, although about 0.7% appears to be more common. 

Also increasing is the time it takes to ship goods. Data from Infor Nexus, as of January, highlighted major delays in shipments originating from Asian ports destined for Western Europe and the East Coast of the United States. Routes from Asia to Germany, for example, experienced a 55% increase in transit times, resulting in an average delay of 12 days. Shipments bound for New York and other East Coast ports were grappling with delays of up to 11 days. 

Compounding the delays caused by Middle East strife is the ongoing drought in Panama. Lower water levels have forced the Panama Canal to drastically reduce the number of daily passages, with predictions in February going as low as 18 vessels per day. Subsequently, shippers are forced to decide to wait for a slot that may take days or even weeks to arrive, either rerouting their vessels and accepting the increase in cost and transit time or moving their goods overland.

When in Doubt, Communicate

While delays pose an inconvenience, it’s a challenge any good moving company can handle when well-equipped with best practices. Key here is communication. “With any emergency or disruption of business, our top priority is the safety of those involved and our customers’ shipments,” says Gavin Bosco, CRP, vice president, global business development and client solutions at Suddath. “Clear communication with mobility leaders is crucial for managing expectations with internal stakeholders and assignees. We regularly issue news alerts and conduct briefing meetings to forewarn about potential service or cost impacts.” 
Suddath’s move coordination team also coordinates with assignees, advising those potentially impacted to anticipate delays and plan accordingly. “Regardless of the nature of the crisis, immediate, verified, and fully transparent communication is the first step essential for collaborating on the appropriate response,” Bosco says. 

Tim McCaffery CRP, GMS-T, global account manager at Suddath, concurs and notes the impact in shipping delays goes beyond the move of goods. “The global freight market has been ambiguous since the height of COVID-19 and still persists with the current global situation,” he says. “[This] cascades into other relocation services, such as temporary housing, destination services, etc., further impacting the time needed for the relocating assignee to settle into to their new location. The most critical action needed in times of ambiguity is proactive communication.” 

The Bright Side

Despite logistical challenges, shipping costs remain lower than they were during the height of the pandemic. Maersk, the second-largest ocean carrier, estimated in early May that customers should expect higher surcharges on shipping invoices as a result of the higher costs borne by the shipping line, which include a 40% increase in fuel use per journey. As of late April, the cost of shipping a container from Asia to northern Europe was $3,550, according to Freightos, a digital shipping marketplace, down from a recent high of $5,492 in January and well below rates that climbed above $14,000 during the pandemic.

One reason for the lower prices is boosted capacity. A large number of container ships, ordered two to three years ago, are entering service. Those extra vessels are expected to help shipping companies maintain regular service as their ships travel longer distances. The companies ordered the ships when the surge in world trade during the pandemic created huge demand. While shipping costs remain elevated, some analysts expect the supply of new ships to push down rates later this year. Before conflict broke out last year, shipping rates had fallen to pre-pandemic levels.

When Will Things Return to Normal?

There is hope that a ceasefire involving Israel, Hamas, and other regional groups might bring stability to the region. However, there is no guarantee of when hostilities will cease or if such an agreement can be reached. Until the world unites in opposing the disruptions to shipping, global talent mobility will have to compensate by considering the added costs and delays involved in transporting goods overseas though affected routes. At a time when many organizations are coping with cost pressures, the events in the Middle East add an extra layer of complexity to the mathematics of shipping.