Red Sea Route Changes: Higher Costs, More Delays

toy train set
Updated Published

LOS ANGELES, Dec 28 (Reuters) - Basic Fun, a toy manufacturing company, is swiftly altering its shipping strategies for products like Tonka trucks and Care Bears, destined for Walmart and other retailers, to avoid the Suez Canal in response to recent militant assaults in the Red Sea.

Major suppliers for global retailers such as IKEA, Home Depot, and Amazon are similarly adjusting their shipping routes, marking the most significant disruption since the COVID-19 pandemic affected global supply chains, as noted by logistics industry insiders.

Basic Fun, headquartered in Florida, typically transports toys from Chinese factories to Europe through the Suez Canal, the most direct route for such shipments, stated CEO Jay Foreman during a phone interview from his Hong Kong office.

This route, crucial for about a third of the world's container ship cargo, faces detours around Africa's southern tip, potentially adding up to $1 million in extra fuel costs per round trip between Asia and Northern Europe.

Shift in Shipping Strategies Due to Red Sea Security Concerns

The drone and missile strikes by Yemeni Houthis in the Red Sea, expressing solidarity with the Palestinian group Hamas in its conflict with Israel in Gaza, have disrupted Basic Fun's shipping plans.

The company is now actively rerouting China-origin shipments to UK and Rotterdam ports through lengthier routes during the holiday season.

Additionally, Basic Fun is redirecting some East Coast-bound shipments from the Suez to the Panama Canal, which is currently experiencing drought, and rerouting others to the U.S. West Coast across the Pacific.

"It’s just going to take longer and it’s going to cost more”,f Foreman mentioned, noting that freight rates from China to the UK have more than doubled to approximately $4,400 per container since the conflict began in October.

As the situation in the Suez Canal evolves, shipping companies like Maersk and CMA CGM are planning to resume Red Sea voyages with military escorts.

Michael Aldwell, Executive Vice President of Sea Logistics at Switzerland's Kuehne + Nagel, anticipates the biggest impact in the coming six weeks. He highlighted that rapidly adjusting global shipping logistics is challenging, predicting a shortage of vessel space, misplaced empty containers critical for China's exports, and a significant rise in short-term transport prices.

Freight platform Xeneta reports that post-escalation shipping costs for a 40-foot equivalent unit (FEU) container from the Far East to the Mediterranean have risen to $2,320, compared to $1,865 in early December. The cost to ship an FEU from China to the UK is now $1,625, up from $1,425.

These figures exclude additional surcharges like "extra ordinary" risk and "Emergency Recovery Cost," which range from $400 to $2,000 per FEU, as stated by Peter Sand, Xeneta's chief analyst.

Intense Competition for Shipping Space

Kuehne + Nagel data indicates that nearly 20% of the global container fleet, equivalent to 364 large vessels capable of carrying over 2.5 million full-sized containers, has been rerouted due to the Red Sea incidents.

Vessel owners are now prioritizing less costly, contract-rate space for customers, explained Anders Schulze, Head of Ocean Business at Flexport. This means customers not fulfilling their contractual volume may only receive a portion of their containers at contract rates, with the rest subject to higher spot market rates.

This situation has triggered a rush to secure shipping space before the early February cut-off for shipments out of China, prior to the extended Lunar New Year factory closures, according to logistics experts.

“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. A number of ship owners have contracted with OL, which is part of the rush for ship spots.

Smaller shippers are particularly vulnerable in this scenario. Marco Castelli, an entrepreneur in Shanghai, is struggling to rebook three containers of machinery components to Italy following cancellations due to the crisis.

Foreman from Basic Fun mentioned that the company, which expects about 40 containers on the sea before the Lunar New Year, cannot pass the additional costs to customers due to fixed-price contracts. "Most suppliers will have to absorb these costs," he said.

(Reported by Lisa Baertlein in Los Angeles, with additional reporting by Richa Naidu in London. Edited by Sayantani Ghosh, Lincoln Feast, Alexandra Hudson)

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