The recent attacks by the Houthi rebel group on cargo ships in the Red Sea have caused disruptions in the shipping industry. However, these disruptions could present an opportunity for freight-forwarding companies to increase their profit margins.
Freight-forwarding companies play a crucial role in providing various services to shippers, including routing, pickup, and delivery. As shipping companies look for alternative routes to bypass the Red Sea, freight-forwarding companies stand to benefit from the resulting higher prices and surcharges.
Some prominent players in this sector include Expeditors International of Washington Inc., FedEx Corp., United Parcel Service Inc. Supply Chain Solutions, and DHL Global Forwarding, which is owned by Deutsche Post AG.
According to T.D. Cowen analyst Jason H. Seidl, a near-term resolution to the Iran-backed Houthi attacks seems unlikely. In a note released on Monday, the analyst firm stated that the disruption caused by these attacks could lead to increased margins for freight forwarders through higher pricing and surcharges. However, it is not expected to cause significant disruptions to the overall supply chain.
The Red Sea serves as a critical shipping lane for cargo passing through the Suez Canal, accounting for approximately 12% of global trade. It is estimated that around 30% of global container traffic goes through the Suez Canal, transporting goods worth $1 trillion annually, as reported by the government of New Zealand in 2021.
Freight forwarders primarily assist shippers with freight consolidation, routing, contracts for ocean/air shipments, and pickup and delivery options. They have contracts with major air and ocean carriers, usually negotiated annually, that determine rates based on expected volumes for different freight lanes. These contracts can be amended throughout the year based on market conditions, as explained by Jason H. Seidl.
The attacks on Red Sea cargo ships have undoubtedly caused disruptions in the shipping industry. However, freight-forwarding companies are positioned to benefit from the resulting higher prices and surcharges. While the resolution to these attacks may not be immediate, it is expected that the disruptions will lead to increased margins for freight forwarders without severely impacting the overall supply chain.
Related: Retailers could face challenges from disruptions in the Red Sea and Panama Canal, warns logistics expert.
Impact of Houthi Attacks on Shipping in the Red Sea
The recent attacks by the Houthi rebel group on cargo ships in the Red Sea have raised concerns among major players in the shipping industry. In response to these attacks, ocean carriers have started detouring around the Red Sea via the Cape of Good Hope, adding 8-12 days to shipping routes from the Middle East and Southeast Asia to the Port of Rotterdam. As a result, the additional costs incurred by carriers are likely to be passed onto shippers, leading to an increase in ocean spot pricing in affected trade lanes.
Moreover, the diversion of shipping routes and the time-sensitive nature of freight are expected to drive up the demand for freight forwarding services, including air transportation, in the immediate term. Shippers are urged to consider alternatives and plan their logistics operations accordingly.
In an attempt to address the escalating security risks, the United States and its partner nations, including Australia, Canada, and the United Kingdom, recently issued a warning to the Houthi rebel group against further attacks on Red Sea shipping. The rebel group, which exercises control over a significant portion of Yemen, has deployed various weapons, including anti-ship ballistic missiles, to target cargo ships. In fact, just hours after the warning was issued, a sea drone attack originated from Yemen.
In response to these security threats, Maersk, a leading shipping company, has decided to suspend its transits through the Red Sea and the adjoining Gulf of Aden. This decision comes as a result of the constantly evolving and highly volatile situation. Maersk has redirected its vessels away from the Red Sea and is now opting for alternative routes, circumnavigating the Cape of Good Hope.
While this change in shipping routes may have implications for logistics operations, Maersk emphasizes that all decisions have been made with careful consideration for the safety of their vessels, seafarers, and cargo. As the situation in the Red Sea continues to unfold, it is crucial for stakeholders in the shipping industry to stay updated and adapt accordingly.