Red Sea shipping workarounds add costs, delays for suppliers, retailers

After terrorist assaults on ships in the Red Sea, the team at Toymaker Basic Fun, which is in charge of managing the maritime shipments of Tonka trucks and Care Bears for Walmart and other shops, is rushing to divert freight from the Suez Canal.

According to insiders in the logistics sector, suppliers to companies like Amazon, Home Depot, IKEA, and others are acting similarly as they struggle with the largest shipment disruption since the COVID-19 outbreak threw international supply chains into turmoil.

CEO Jay Foreman of Florida-based Basic Fun stated in a phone interview from his Hong Kong office that the company typically transports all toys intended for Europe from its factory in China via the Suez Canal, which is the fastest route for moving products between both regions.

Approximately one-third of all container ship freight worldwide travels over that trade route, and it is anticipated that rerouting ships to avoid the southern point of Africa may result in up to $1 million in additional fuel costs for each round journey between Asia and Northern Europe.

Shipping preparations have been disrupted by the Houthis of Yemen, who launched missile and drone assaults in the Red Sea to demonstrate their support for Hamas, a Palestinian Islamist organisation that is battling Israel in Gaza.

Now, Basic Fun is putting in extra effort during the holidays to ship toys from China via the lengthier route to ports in Rotterdam and the UK.

It is also diverting some goods bound for ports on the US East Coast from the Suez Canal to the drought-choked Panama Canal, while switching others to the West Coast via the direct route across the Pacific Ocean.

“It’s just going to take longer and it’s going to cost more,” said Foreman, who added that rates for some China-UK freight have more than doubled to around $4,400 per container since the Israel-Hamas conflict began in October.

The Suez Canal situation remains fast changing, and shippers Maersk and CMA CGM are moving to resume voyages with military escorts through the Red Sea.

The biggest impact likely will come over the next six weeks, said Michael Aldwell, executive vice president of sea logistics for Switzerland’s Kuehne + Nagel.

“You can’t flick a switch” and reorganize global shipping, said Aldwell, who expects the diversions to cause a shortage of vessel space, strand empty containers needed for China exports in wrong places and send short-term transport price indexes sharply higher.

According to estimates from freight platform Xeneta, it costs $2,320 to ship a 40-foot equivalent unit (FEU) container from the Far East to the Mediterranean “post escalation” versus $1,865 per FEU in early December. It costs $1,625 to ship an FEU from China to the United Kingdom “post escalation” versus $1,425 per FEU in early December.

These rates do not include “extra ordinary” risk surcharges and “Emergency Recovery Cost” that can be between $400 and $2,000 per FEU, Peter Sand, chief analyst at Xeneta, said.

Scramble for space

As of Wednesday, nearly 20% of the global container fleet – or 364 hulking container vessels capable of carrying just over 2.5 million full-sized containers – had been set on a new course due to the Red Sea attacks, according to Kuehne + Nagel data.

Mitsui O.S.K. Lines and Nippon Yusen, Japan’s largest shipping companies, said their vessels with links to Israel were avoiding the Red Sea area and both companies were monitoring the situation carefully for next steps.

Vessel owners already have begun rationing the less expensive, contract-rate space they reserve for customers, said Anders Schulze, head of the ocean business at digital freight forwarder Flexport.

For example, he said, a customer who delivers five containers a month versus the 10 promised in their contract may only get five containers at contract rates. The remainder would be subject to expensive spot market rates.

This has set off a scramble to reserve space ahead of the early February deadline to get goods out of China before factories there close for the extended Lunar New Year celebrations, logistics experts said.

“Every single booking (out of China) now needs to be reconfirmed. The dates could change, the routing may change,” said Alan Baer, CEO of OL USA, which handles freight shipments for clients. OL has contracts with ship owners and is part of the rush to secure spots on ships.

Small shippers are most at risk of being elbowed out.

Marco Castelli, who has an import/export business in Shanghai, has been trying to rebook three containers of Chinese-made machinery components bound for Italy after the shipments were cancelled due to the crisis.

“Transfer my situation to a large corporation and you get what’s going on,” he said.

Foreman at Basic Fun, which plans to have about 40 containers on the water before the Lunar New Year, said the company’s contracts with customers don’t include a way to recover the extra expense. “The price is fixed. (Most suppliers) are going to have to eat those costs.”