Red Sea Crisis Turning Out to be a Big Nightmare

Amidst soaring tensions and geopolitical strife, global exporters find themselves navigating treacherous waters as Freight rates skyrocket by over 700%. The supply chain landscape is marred by mounting woes, exacerbated by relentless Houthi attacks that not only escalate freight rates but also inflate insurance costs and prolong travel times.

The Red Sea becomes a battleground for Yemen’s Houthi militants, launching missile and drone assaults in solidarity with Palestinians amid the Gaza conflict.

Ocean freight firms, grappling with security concerns, are compelled to reroute vessels away from the Suez Canal, opting for the circumnavigation of the Cape of Good Hope at the southern tip of Africa.

Many exporters, bound by cost, insurance, and freight agreements, find themselves bearing the brunt of escalated freight and insurance expenses.

In India, the impact is particularly severe on small exporters, who constitute 40% of the nation’s annual merchandise exports valued at approximately $450 billion. These exporters sound the alarm, warning of imminent job losses that could escalate if the attacks, which commenced late last year, persist.

Even prior to this crisis, India’s small exporters operated on razor-thin profit margins, typically ranging between 3% and 7%, as per industry estimates.

K.E. Raghunathan, a Chennai-based manufacturer and national chairman of the Association of Indian Entrepreneurs, laments the visible job losses in Tirupur, India’s textile hub, where small exporters operate at a fraction of their capacity. He emphasises the urgent need for government intervention to support small exporters, lest they face extinction.

Export organisations are requesting the government for relief, prompting the establishment of a trade ministry panel to monitor the situation and address pleas for assistance.

The ramifications of the crisis are profound, disrupting more than 80% of India’s merchandise trade with Europe and the United States. Key sectors such as textiles, engineering goods, gems, and jewelery, face substantial challenges in exporting to these regions.

ESCLATED COSTS A MAJOR ISSUE

Disruptions in the Red Sea route is pushing up logistics costs for exporters, even as several small volume cargo is diverted from sea route to air, which is leading to space constraints and higher Air Freight charges.

Air freight costs are almost two times higher and so far, the garment buyers are bearing the costs. However, if the situation continues to remain bad, they may look at alternative destinations such as Turkey for sourcing which will further intensify the situation of exports from India.

There is a space crunch also for those wanting to airlift the goods, as even most of the small volume cargo are not going by sea now.

Some shipping lines are also studying the possibility of alternative routes such as Caspian Sea. But they are hesitating to take risks.Rerouting via the Cape of Good Hope translates to extended shipping durations of 15-20 days for vessels departing from India, significantly inflating costs.

A shipping a container to Britain now commands a staggering $4,000 compared to the pre-crisis rate of $600. If cargo movement by sea took 32 days from an Indian port to a European port and cost $700 (40 feet container), it now takes 55 days and costs almost $4,000.

Since the time taken is longer, there is a shortage in availability of vessels and containers. The exporters are trying to negotiate with their buyers. If the buyers share the costs, there is some relief for the exporters.

India’s small exporters, already reeling from weakened demand and high inflation in Western economies, red sea crisis has put them in a challenging situation.

In the textile industry, which directly employs 45 million people in India and indirectly supports another 15 million, concerns mount over losing business to Turkey’s clothing industry, which enjoys a strategic advantage in the European market.

Despite the bleak outlook, there’s a glimmer of hope as many export contracts for India come up for renewal in March or April. Smaller exporters express optimism, hoping that their longstanding relationships with customers will lead to shared responsibility in absorbing increased freight costs during contract renegotiations.

FAST FASHION DISRUPTED….

Many brands in the international arena especially those whose sales depend on fast fashion trends and speedy deliveries are finding themselves forced to choose between delivering trends on time by expediting their packages through expensive routes, like air freight, or accepting delayed shipments as an uncontrollable factor.

Chris Rogers, the head of supply chain research at S&P Global Market Intelligence, explained that if the disruptions last beyond the next few weeks, “which we expect they will, then seasonal deliveries will need to depart two weeks earlier than normal,” to keep up with companies’ design and sales models. He warns that this “could be disastrous for businesses that rely on an eight-to-10-week turnaround time from design to sale.” Many will “need to consider alternative transportation routes like air freight,” he said.

Several brands have already announced shipping delays, like IKEA that the company does not own its own shipping vessels and that its partners have decided to re-route vessels around Africa.

Apparel brand Abercrombie & Fitch announced late last month that it is considering using air freight, which can cost up to 16 times more than cargo ships, to avoid significantly delayed shipments, according to Bloomberg.

The IMPACT

South Asia is a major hub of the U.S fast-fashion economy, and retailers that manufacture there will be “impacted the most” by delays and higher shipping prices according to Jonathan Gold, the vice president of supply chain and customs policy at the National Retail Federation. In 2022, about 45% of American apparel imports came from Asia.

According to a Statista report, the huge Southeast Asia market for apparel is projected to generate over $50 billion this year. The most profitable section is for women’s apparel, which is expected to generate almost half of the market’s revenue this year, and 93% of apparel sales from the region are non-luxury items.

Some of the countries that make up this sector include India, China, Bangladesh, Pakistan, and Sri Lanka.

Inditex, the owner of H&M and Zara, relies on shipments to Europe for about 60% of its sales, and H&M, which depends more on Asian markets, may face more shipping related problems.

The NRF’s Gold explained that the disruptions are already costing companies money, and could get even pricier. Factors like drought in the Panama Canal are compounding the already extended times for shipping vessels to return and be reloaded, contributing to higher costs for shippers and retailers.

RETAILERS FACING THE BRUNT

Many fast fashion brands who need speedy deliveries are forced to choose between delivering trends on time by expediting their packages through expensive routes, like air freight, or accepting delayed shipments as an uncontrollable factor.

A lot of retailers in the US are facing shortage of stocks because of disruptions in the Red Sea.

Attack on vessels in the Red Sea by the Iran-backed Houthi militia have disrupted trade on one of the world’s most important shipping routes, adding between 10 and 15 days to transit times as ships take the safer route around southern Africa.

Many retailers around the globe are stocking up on goods and seeking air or rail alternatives in a bid to avoid empty shelves during spring.

While the Suez disruptions mainly affect Asia-to-Europe trade, about 30% of shipments to the U.S. East Coast go through the canal.

U.S. retailer Target is experiencing some disruptions of shipments from India and Pakistan due to the crisis in the Red Sea. The company has faced delays in receiving some shipments, in line with the extended transit times that vessel operators are seeing, as it works with its shippers to redirect merchandise around the Suez Canal. It has resulted in extra time and costs associated with re-routing were expected to be minimal.

Target gets garments, plastic, toys and bath products among other things from suppliers in India and Pakistan, which are important sources for the U.S. retailer, according to its global factory list. These products are typically shipped through the Suez Canal.

Chris Rogers, the head of supply chain research at S&P Global Market Intelligence, explained that if the disruptions last beyond the next few weeks, “which we expect they will, then seasonal deliveries will need to depart two weeks earlier than normal,” to keep up with companies’ design and sales models. He warns that this “could be disastrous for businesses that rely on an eight-to-10-week turnaround time from design to sale.” Many will “need to consider alternative transportation routes like air freight.

Several brands have already announced shipping delays, like IKEA, which wrote in a statement to Fortune that the company does not own its own shipping vessels and that its partners have decided to re-route vessels around Africa

Apparel brand Abercrombie & Fitch announced that it is considering using air freight, which can cost up to 16 times more than cargo ships, to avoid significantly delayed shipments., according to Bloomberg.

WHO WILL ABSORB THE PRICE HIKE???

South Asia is a major hub of the U.S fast-fashion economy, and retailers that manufacture there will be “impacted the most” by delays and higher shipping prices according to Jonathan Gold, the vice president of supply chain and customs policy at the National Retail Federation. In 2022, about 45% of American apparel imports came from Asia.

According to a Statista report, the huge Southeast Asia market for apparel is projected to generate over $50 billion this year. The most profitable section is for women’s apparel, which is expected to generate almost half of the market’s revenue this year, and 93% of apparel sales from the region are non-luxury items. Some of the countries that make up this sector include India, China, Bangladesh, Pakistan, and Sri Lanka.

The NRF’s Gold explained that the disruptions are already costing companies money, and could get even pricier. Factors like drought in the Panama Canal are compounding the already extended times for shipping vessels to return and be reloaded, contributing to higher costs for shippers and retailers, he said.

The vessels that were destined for the Suez Canal or the Red Sea are re-routed, they’re now taking longer to return to shippers as empty vessels. The longer trips mean the vessels are “off their rotation schedules,” which adds pressure as shippers can’t reliably expect when they’ll be empty and free to reload again.

The delays also put pressure on other markets that aren’t used to receiving shipments, like the U.S. west coast. Beyond that, the higher costs of travel and fuel mean that shipping companies are negotiating additional charges for their customers. These special emergency charges could cost retailers between hundreds and thousands of dollars per shipment.

Retailers are looking for solutions like trying to ship earlier and using air freight, but they all come at a cost and it is creating a lot of impact. Companies are trying to mitigate it but it’s uncertain.”

U.S. customers who are buying clothes have yet to feel the price pinch.

Retailers are doing everything they can to avoid empty shelves and price increases.” Customers might still face pricier clothes “dependent on how long the situation continues,” he said, adding that European fashion consumers could feel more of a price increase as that market is more dependent on the Red Sea trade lane.

Shipments from Asia account for almost 20% of all imports to the eastern coast of the U.S., and apparel comprises about 58% of those shipments.

Shipping rates from East Asia to North Europe have surged 235% since the middle of December, pricing a standard, 40-foot shipping container at $5,106. Still, according to a report by S&P Global Market Intelligence earlier this month, the elevated price is still well below the peak shipping price of the pandemic, which hit $18,000 per shipping container in September 2021.

International shipping company Maersk, which provides shipping for more than 100,000 customers and 130 countries, announced in mid-December that it would pause all vessels bound for the Red Sea following a “near-miss incident,” and “another attack on a container vessel,” later that week.Maersk announced that explosions in the area forced two ships, operated by the company’s U.S. subsidiary and carrying military supplies, to turn around. The company also ships for brands like PUMA, Vans, Timberlands, Jansport and more.

Data from S&P Global showed the Suez Canal route accounts for 14.8% of all Europe and Middle East and North Africa (MENA) imports. Its analysis showed consumer goods, clothing and chemicals were among the sectors at most risk.

The delays also put pressure on other markets that aren’t used to receiving shipments, like the U.S. west coast. Beyond that, the higher costs of travel and fuel mean that shipping companies are negotiating additional charges for their customers. These special emergency charges could cost retailers between hundreds and thousands of dollars per shipment.

Timing is also not on shoppers’ side, Gold said.

Contract rates between retailers and shippers typically expire between April and May, and discussions on what terms–and costs–should be in the new ones are underway.

U.S. customers who are buying clothes have yet to feel the price pinch, Gold said, and added that “retailers are doing everything they can to avoid empty shelves and price increases.” Customers might still face pricier clothes “dependent on how long the situation continues.

European fashion consumers could feel more of a price increase as that market is more dependent on the Red Sea trade lane.

The post 700% Increase in Freight Rates appeared first on Perfect Sourcing — Latest Fashion, Apparel, Textile and Technology News.