Global Shipping Facing Rough Waters

Altered shipping routes are making supply chain chaos the new normal.

January 08, 2024

Maersk said Friday it would extend its diversion of vessels from the Red Sea for the “foreseeable future” due to safety concerns amid a spate of attacks by Houthi militants, reported CNBC.

“The situation is constantly evolving and remains highly volatile, and all available intelligence at hand confirms that the security risk continues to be at a significantly elevated level,” Maersk said in a statement.

Shipping giants like Maersk say its industry, which handles 90% of global trade, faces the possibility of significant disruptions, from ongoing wars to droughts affecting key routes like the Panama Canal, reported Reuters

The diversions will increase delays and raise costs for retailers like Walmart, IKEA and Amazon, as well as food makers such as Nestle and grocers including Lidl, reported Reuters. Complex vessel schedules are likely to be knocked out of sync for giant container ships, fuel tankers and other commodity haulers throughout the year.

"This is seemingly the new normal—these waves of chaos that seem to rise and fall. Before you get back to some level of normalcy another event happens that sort of throws things out of whack," said Jay Foreman, CEO of Florida-based Basic Fun, who sends toys from factories in China to Europe and the United States.

Ship owners' fuel costs are up as much as $2 million per round trip for Suez Canal diversions and the Asia-Europe spot rate has more than doubled from 2023's average to $3,500 per 40-foot container. The increased costs could translate into higher prices for consumers, though Goldman Sachs said that the inflation shock should not be as bad as the 2020-22 pandemic chaos, according to Reuters.

"You can always say, 'It's a one-off event,' but if the one-off events happen every other month, they're not anymore one-off events," said John Kartsonas, managing partner at Breakwave Advisors, the commodity trading advisor for the Breakwave Dry Bulk Shipping ETF.

Last month, BP announced that it had stopped sending ships through the Red Sea due to increasing security risks.

Should the attacks continue, there is a risk that oil companies and other shippers may stop using the Suez Canal for an extended period of time, disrupting the flow of oil from Saudi Arabia and Iraq to the rest of the world and affecting oil prices. If those routes are closed, tankers will need to take the long way around the Cape of Good Hope in Africa, burning more fuel in transit and increasing freight rates and insurance premiums.