Market Insights

Navigating Geopolitical Currents: Red Sea Disruptions and a Demand for a Different Approach

By 15 January, 2024No Comments

Container ships on the Red Sea

The Suez Canal, a vital passage in the Red Sea, became a focal point of global attention in March 2021 when a container vessel blocked the canal for six days, bringing daily trade valued at up to $10 billion to a standstill. The incident underscored the vulnerabilities of this key trade route and raised concerns about the potential impact on European companies heavily reliant on its efficient functioning.

For years, companies have implemented globalized and streamlined supply chain strategies, leveraging the route between Asia to Europe presented by the Middle East to keep up with customer demands and reduce costs. However, escalating conflicts in the Middle East are casting a shadow of uncertainty over global supply chains and European companies are not immune to the ripple effects of geopolitical tensions in the region. A pivotal aspect of this uncertainty is the recent disruptions arising from attacks by Yemen’s Iran-aligned Houthi militants on ships in the Red Sea in December 2023. As the turmoil unfolds, businesses in Europe are being urged to take a closer look at their supply chain strategies, particularly those linked to the Suez Canal passage, to safeguard against potential disruptions.

Strategic Re-routing Initiatives

The Red Sea stands as a linchpin in global trade, serving as a crucial maritime corridor connecting the Mediterranean Sea to the Indian Ocean. With approximately 15% of the world’s maritime trade flowing through this strategic waterway, disruptions in the Red Sea have far-reaching consequences for the global economy.

In response to recent disruptions, major freight firms have undertaken a re-routing strategy, opting to navigate around the Cape of Good Hope, located at the Southern Tip of the Cape Peninsula to avoid the Suez Canal. Since December, four of the world’s five largest container shipping companies, CMA, CGM, Hapag-Lloyd, Maersk and MSC have paused or suspended their services in the Red Sea, the route through which traffic from the Suez Canal traverses. According to Marine Traffic data, the number of container ships passing through the Red Sea in December 2023 decreased by 25 per cent compared to the number of ships in December 2022 since the attack. The imperative for such a re-routing strategy is not without its costs, placing a substantial burden on companies in terms of both resources and time. The alternative route between Asia and Europe, around the Cape of Good Hope, adds more than a week to a ship’s journey.

Graph showing ocean freight lead times

Implications for European Companies

European companies find themselves in a precarious position, as disruptions in the Red Sea, particularly the Suez Canal, pose significant challenges to their supply chains. A substantial portion of Asia-Europe trade normally goes through the Suez Canal, emphasizing the region’s reliance on this maritime route for timely and cost-effective transportation of goods.

Adapting to the uncertainties, European companies must embrace agility and foresight. The incident in the Suez Canal and recent disruptions amid attacks by Houthi serves as a stark reminder that geopolitical volatility can swiftly impact supply chains. Staying informed about ongoing security threats, evaluating alternative shipping routes, and maintaining a proactive stance are essential components of navigating uncertainty. The uncertainty surrounding the Middle East conflicts adds a layer of complexity for European companies assessing political risks in their supply chains. One of the challenge lies in distinguishing between the immediate impact on the supply chain and the potential for risks to expand or endure indefinitely. The difficulty in judging whether the conflict will remain localized or escalate further poses a strategic dilemma for businesses.

Graph showing ocean freight rates

Diversification as a Risk Mitigation Strategy

Leveraging supply chain diversification as a strategy to mitigate risks for European companies can be key. Diversification involves not only spreading suppliers across different regions but also considering alternative shipping routes to reduce dependency on the Red Sea. Assessing vulnerabilities at various levels, including the stability of transportation routes and local infrastructure resilience, becomes paramount.

Each year, ARC Consulting performs an extensive survey with business leaders with exposure to Asia. Insights from this Annual Sourcing Survey 2023 suggest that strategically diversifying sourcing to mitigate geopolitical risks and enhance overall resilience could provide vast value. The lesson from the Suez Canal incident reinforces the importance of a diversified network of suppliers and alternative shipping options to navigate unforeseen challenges and disruptions in the global supply chain landscape.

In this context, European companies exemplify agility by staying well-informed and progressively turning to local sources for diversification, effectively reducing reliance on specific manufacturing hubs like China. Despite China maintaining its significance as a key sourcing market, 30% of respondents in our Annual Sourcing Survey expressed intentions to relocate at least parts of their sourcing within the upcoming year. This adaptability is notably evident in the increasing trend of sourcing closer to home, driven by disruptions such as the Suez Canal incidents, the Covid-19 pandemic, and various other influencing factors.

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