The New Year has been off to an interesting and somewhat unsettling start. The last few years have been eventful and not always in a good way; it seems like 2024 is not going to be any different. For the past few days, the situation in the Red Sea has been making headlines around the world.

A lot of companies and organizations are worried about the potential impact on the global economy, and rightfully so. The crisis has been caused by geopolitical reasons; however, we don’t want to go too deep into the political aspects of it. We are interested in the long-term impact the current situation is going to have on the logistics industry.

We can already see the disruption of schedules, supply chains and inflated prices. To fully understand the importance of what’s happening, we will try to explain how this disruption might have a much larger effect on the world than we imagine.

Importance of the Region for Trade and Logistics

Importance of the Region for Trade and Logistics

With its link to the Suez Canal, the Red Sea is one of the busiest trade lanes in the world. It is a crucial and strategic waterway link in the trade route that connects Europe, the Middle East, and Asia. Approximately 12% of global shipping goes through the Red Sea and the Suez Canal. It is also a crucial trade route for oil. For example, due to the situation, oil prices went up, and right now, Brent Crude is $78.92 a barrel, and WTI is at $73.33. And the prices shift every hour.

Blocking a major choke point will inevitably have severe consequences. The prolonged conflict and escalating tensions in the Middle East might have a devastating effect on the economy, reignite inflation, and disrupt supply chains. Technically speaking, that’s already happening; we’re just at the tip of the iceberg

Key Players in the Region

Key Players in the Region

The Red Sea region is home to several key players, including Egypt, Saudi Arabia, Yemen, and Sudan. Egypt controls the Suez Canal, an extremely important waterway that connects the Red Sea to the Mediterranean. In recent years, the Red Sea has become a hotspot for geopolitical tensions, influencing the entire region. Which, in return, disrupts the world economy.

The Crisis of 2024

The Crisis of 2024

Regional Tensions and Implications

We live in an era of regional conflicts; that’s just how it is right now. Due to attacks by Houthi rebels, logistics companies, and organizations had to either pause their shipments or reroute them.

Rerouting is possible but rather expensive and difficult. The best possible example of this might be the blockage of the Suez Canal in 2021. The container ship was stuck in the canal, blocking the way. It caused the loss of US$9.6 billion in daily commerce for over a week. If companies opt for rerouting, the shipment will take 7-14 days longer to deliver compared to the Suez Canal.

This means that as long as that part of the sea is not accessible, container ships and vessels that carry everything from car parts to electronics and oil - will be delayed. On top of that, there are much deeper concerns regarding the safety of the supply chains. The UN has urged all the involved parties to take measures to protect the transferred goods. This is a complex issue that requires a coordinated effort to resolve it.

Effect of the Logistics Industry

Effect of the Logistics Industry

As mentioned earlier, this situation has had a significant impact on the logistics industry, causing disruptions in trade routes and increasing transportation costs. Here are some of the recent numbers compared to December 2023:

Average sea cargo container price comparison

Disruption of Trade Routes

The current situation has resulted in delays in schedules. This is a major concern for shippers and supply chain partners. Suffice it to say that caused the incredibly inflated transit prices.

The number of vessels entering the Red Sea has almost declined twice in the first week of January. Forced detours and restrictions will cause a lot of damage to the logistics industry down the line.

Alternative Routes

Shippers are now looking for alternative routes to avoid the Red Sea, which is leading to longer transit times and increased transportation costs. This is especially true for key trade lanes such as Asia-Europe, where freight rates are on the rise.

Increased Transportation and Fuel Costs

The current disruption is having a ripple effect on freight rates, with shipping costs between Asia and the U.S. now spiking as well. There’s also a higher security risk due to attacks in the area. This, in return, has obviously increased the insurance due to the higher risk of piracy and attacks.

Since shipping companies are now using alternative, longer routes, that leads to higher fuel costs. This is adding to the overall cost of transportation and making it more difficult for shippers to manage their supply chains.

Importance of Proactive Measures for the Industry

Importance of Proactive Measures for the Industry

There’s an obvious level of danger for cargo and personnel traveling through the region. The Red Sea crisis emphasizes the importance of proactive measures for the logistics industry. Companies should identify risks and vulnerabilities in their supply chains and develop contingency plans to deal with unexpected disruptions. They also should explore alternative routes to control all the possible risks.

This might require a coordinated response from all the organizations. After all, companies will most likely face the same challenges; therefore, sharing information, developing common standards, and implementing best practices might demonstrate the resilience of the industry.

Our Outlook on the Situation

Our Outlook on the Situation

To put it simply, this is going to be a long and painful development. The crisis in the Red Sea highlighted the importance of the region, but at the same time, it showed the vulnerability of the logistics industry to geopolitical tensions. As we have mentioned earlier, this situation will cause a lot of damage in the long run; it’s inevitable.

The inflated prices are most likely not going down anytime soon. Unfortunately, there’s no indication that the problem will be resolved shortly. The geopolitical tension will most likely continue escalating, subsequently affecting not only shipping companies but consumers as well. The current situation will have a domino effect by changing the norms and requiring all of us to adapt. And we mean all of us.

You might think this doesn’t concern you because the Red Sea is somewhere far away, but it will directly impact everyone. The truth is that alternative routes are very limited, and the crisis will continue looming over the global economy like a bad omen. There’s hardly any silver lining right now; we have to be prepared for delays and higher shipping rates - that will be the new norm for the foreseeable future.