Just when you thought the last shipping crisis was a distant memory, here comes another disruptive situation.
Though happening thousands of miles away from North America, continued attacks on container ships in the Red Sea – which show no sign of abating - have the potential to impact tire importers, dealers and distributors who order products from overseas plants and/or work through a manufacturer or distributor that brings in tires from off-shore points of origin.
In response to the seemingly non-stop attacks on their boats, shipping companies have been diverting vessels away from the Suez Canal, which connects the Red Sea to the Mediterranean Sea, to protect their people, freight and other assets.
A growing number of logistics companies are sending ships around the southern tip of Africa rather than risk assault.
“Nearly all container services previously using Suez have decided to divert via the Cape of Good Hope,” Simon Heaney, senior manager, container research, for Drewry, a leading provider of consulting services to the global shipping industry. (Based in the United Kingdom, Drewry also has offices in China, India and Singapore.)
While the Suez Canal remains open, “the decision to re-route is more of an exercise in risk management on the part of carriers.”
Simon noted that North American importers have been “impacted less directly” from container ship diversions than their European counterparts “as services from Asia mainly use West Coast gateways” across the Pacific or by way of the Panama Canal.
But that doesn’t necessarily mean that North American tire importers, dealers and distributors who sell off-shore products will be immune to the knock-on effect of what’s happening in the Middle East and the subsequent economic fall-out.
If the Red Sea situation persists for the rest of the year, global container capacity “will be greatly reduced, which will make the market tighter than it otherwise would have been,” according to Heaney. “Shipping lines will have to adjust networks to cater for extra distances and time.”
Heaney told MTD that rerouting ships around the Cape of Good Hope adds about 10 days of shipping time from Asia to Europe alone. This, of course, increases the expense of doing business for shipping companies, which then “reroute” their new costs to customers.
With that in mind, it’s worth taking a deeper look at the impact all of this is having in Europe, especially as it pertains to price.
In a Jan. 18 report from Drewry, Heaney wrote that “new (shipping company) surcharges related to the Suez crisis have quickly appeared under different nomenclatures, including Transport Disruption Surcharge, Emergency Operation surcharge and Contingency Adjustment Surcharge, just to name three.
“One carrier told Drewry that because of the many additional costs related to the Suez Canal diversion are dynamic, it is very complex to break down and itemize all of the various cost components that make up the overall surcharge price at any given time. These could involve things such as additional equipment utilization days, implementation and use of added shuttle services,” as well as “costs incurred due to higher sailing speed, additional storage charges, additional cost for crew being onboard for longer voyages” and other factors. (I imagine the cost of military escorts also factors into the equation.)
On the bright side, “the surplus of container ships is much greater today than it was during the pandemic. That’s bad news in normal times for carriers, but it provides more resilience to cope with disruptive events.”
The demand situation for most products is different today than during COVID-19 lockdowns, when “there was a surge in demand for physical containerized goods, which when coupled with logistics capacity shortages, sent shipping costs into orbit,” wrote Heaney. (Hard to believe those lockdowns started nearly four years ago, isn’t it?)
“Affected markets will be much tighter than they otherwise would have been, but there is sufficient spare capacity in the system.”
A “worst case scenario” outlined by Drewry predicted that if the Suez Canal was avoided for the remainder of 2024, “assuming a 30% increase in trade distance for the roughly 30% of container ships capacity that previously transited Suez,” capacity would be reduced by around 9%.
With that said, however, “disruption is a proven recipe for driving up shipping costs and the more chaos it causes, the bigger the freight rate inflation will be,” according to Heaney. Will this directly impact your dealership? That depends on a lot of factors. But COVID-19 taught us that the world is more interconnected than we ever imagined, so I urge you to continue keep an eye on the global shipping situation. It’s worth your time.
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