Red Sea crisis: The impact and how to manage cargo risk and supply chain delays in the face of trade disruption

The ripple effect of Red Sea crisis has resulted in the disruption of global shipping and retail supply chains.

The Suez Canal, which connects the Red Sea to the Mediterranean Sea, accounts for 12-15% of global trade and 20-30% of global container shipping volumes. Recent supply chain delays caused by the Red Sea crisis has been further exacerbated by extreme weather conditions that caused the Panama Canal in Central America to become impassable for extended periods.

In the Red Sea, a major shipping and logistics company flagged that disruptions would reduce capacity between Asia and Europe by up to 20% in the second quarter of 2024, with the risk zones expanding and reaching further offshore.¹ The Red Sea crisis has led to a decrease of 67% in container ship transits.

Impact on freight cost and carbon emissions

The average price of transporting a 40-foot container on a cargo ship has increased significantly. From mid-December 2023 to mid-May 2024, the Drewry’s World Container Index increased from US$1,521 per 40 ft to US$3,159 per 40 ft. This increase in shipping costs has been highest on Asia-Europe routes, which typically pass through the Red Sea. Average shipping cost rates from Shanghai have more than doubled since early December 2023, while rates to Europe have more than tripled. Some shipping lines continue to sail through the Red Sea and Suez Canal with naval escorts, which can further increase shipping costs.

In addition to higher charter rates, fuel costs on the affected routes are also 40% higher per journey, resulting in higher surcharges for shippers,² and higher carbon emissions. A large container ship’s journey from Shanghai to Hamburg emits 38% more carbon dioxide (CO2), equating to 4.32 million kilogrammes, if it goes around Africa instead of through the Suez Canal, according to data from LSEG³.

Impact on insurance rates

As a result of the Red Sea crisis forcing diversions and delays, rates for breach of warranty (BoW) insurance coverage have risen for a single voyage between seven to 14 days. Cargo markets are also charging a premium for sailing through the Red Sea, compared to no premium charged previously.

In addition to higher shipping rates, surcharges, and insurance premiums, businesses also face disruptions from the loss or damage of goods (e.g. spoilage) as a result of the Red Sea crisis and longer shipping times. Sectors such as energy markets, food and agriculture, metals, and manufacturing — especially industries with short ‘product-to-market’ life cycles — can suffer amplified losses from the restricted availability of parts and components.

How to address short term price hikes and supply chain delays

Marsh Asia recommends the following strategies for businesses to gain control over the movement of goods, routes, subcontractors, and liability:

Renegotiate contracts with freight forwarders
Test crisis management plan and use the results to inform transit planning and operations in High Risk Areas (HRA).
Diversify supply chains to reduce reliance on high-risk routes
Manage increased costs through pricing adjustments or efficiency improvements.
Invest in low carbon technologies and fuels to mitigate the impact of higher carbon emissions from longer routes

From a risk perspective, businesses should review their marine cargo policy wordings and consider increasing coverage for rerouting, and completion of voyage costs, even in delay-only scenarios where no physical damage has been incurred.

For businesses directly involved in an attack, they can rely on Marsh Asia’s claims advisory expertise to ensure their interests are protected.

How to manage port congestions

To effectively manage port-related risks, businesses can consider:

Establish relationships with local or alternative facilities for additional storage.
Exercise due diligence as choosing the first available storage can lead to higher costs.
Carefully assess contracts that impose performance standards on ports.
Review bills of lading terms as shipments sent to an undesignated port can result in contract of affreightment being cancelled.
Ensure effective healthcare systems for port workers.
Regular review of insurance coverage to mitigate evolving risks.
If sailing through the Red Sea, consult government agencies for safe passage guidance.

^{1 Reuters. (May 2024). Maersk says Red Sea disruption could cut Asia-Europe capacity by 20%. https://www.reuters.com/business/red-sea-disruption-cuts-q2-capacity-by-15-20-maersk-says-2024-05-06/}

^{2 Maersk. (May 2024.) What the situation in the Red Sea means for your business. https://www.maersk.com/news/articles/2024/05/06/what-the-situation-in-the-red-sea-means-for-your-business}

^{3 Escalating emissions: How Red Sea disruptions are driving up carbon emissions. https://www.hellenicshippingnews.com/escalating-emissions-how-red-sea-disruptions-are-driving-up-carbon-emissions/#:~:text=Those%20extra%20kilometers%20(miles)%20are,pulled%20for%20Reuters%20by%20LSEG.}