Trade experts warn Congress on Red Sea chaos

The world’s largest shipping company, MSC, and several retail and trade experts warned Congress on Tuesday that if the Red Sea chaos caused by Houthi rebel attacks is not stopped, the rise in freight prices will spread further into the global economy and hit consumer wallets.

Charles “Bud” Darr, executive vice president of Mediterranean Shipping Company (MSC), who served in the U.S. Navy, told the House Subcommittee on Coast Guard and Maritime Transportation that the level of sophistication in the Houthi attacks and their use of technology has made the Red Sea and Gulf of Aden not safe enough to protect its most vital asset, seafarers, as well client cargo.

“The shooting has to stop so we can put our sons and daughters back on that trade route,” Darr told House members.

“They [Houthis] are merchants of chaos and they enjoy being chaotic,” said Dr. Ian Ralby, founder and CEO of I.R. Consilium, which advises on maritime law, development, security and strategy, and private security regulation.

Ralby stressed the crisis in the Red Sea is not just a U.S. problem, but recent attacks by the U.S. military have led to greater targeting of its vessels.

Typically, he said, the rebel group “doesn’t care” if it hits a U.S. vessel or another vessel. “They are indifferent.”

But he added, “Since we started striking targets in Yemen there has been an increase in the targeting of U.S. ships. Those (attacks) are aided by Iran.” He described the increase in U.K. and U.S. vessels as “problematic.”

The subject of the U.S. Navy prioritizing security for U.S. flagged ships over foreign vessels was posed by Congressman Salud Carbajal (D-CA) to the MSC executive.

Four senators from the Senate Foreign Relations Committee recently sent a letter to President Biden on the topic.

MSC does not have any U.S. flagged vessels in its fleet, while other foreign carriers including Maersk and Hapag Lloyd do.

“We are a conduit of world trade,” Darr said. He added that while MSC is foreign flagged, it does pay U.S. taxes and employs many Americans across its operations.

“Keep the trade lanes open,” Darr said. “It comes down to serving the commerce needs of the trading partners and what they need is what we provide.”

MSC was the No. 1 ocean carrier handling U.S. imports, based on 2023 cargo arrivals data.

Its ocean alliance partner, Maersk, was No. 1 on the export side. Maersk is also a foreign-flagged ocean carrier.

Maersk recently announced two of its American-flagged vessels, the Maersk Detroit and Maersk Chesapeake, were attacked on January 24, during a scheduled U.S. Navy accompaniment for a northbound transit of the Bab el-Mandeb. After those attacks, Maersk announced it would no longer be transiting the Red Sea.

Vessel delays and supply chain inflation

The attacks on global shipping have created a huge wave of vessel diversions since December and delays in the global supply chain.

MSC announced on December 17 that it would divert its services that would typically transit the Red Sea and the Suez Canal around the Cape of Good Hope.

Sailing around the Cape of Good Hope to avoid the Red Sea adds one to two weeks to a one-way shipping journey relative to the Red Sea and Suez Canal. Europe’s route is longer than the U.S. in this diversion, which is why air freight usage is up.

Maritime advisory firm Sea-Intelligence said the average delay for late vessel arrivals has “deteriorated,” increasing by 0.30 days month over month to 5.35 days. 

The delays in the arrival of containers have led companies including Suzuki Motor, Tesla, Volvo, and Michelin to say they have had to halt manufacturing. Ikea, British retailer Next and Crocs have all warned of product delays. General Electrical appliances are also among the top items moved along the Red Sea/Suez Canal route.

National Retail Federation companies are seeing container prices double from $1,500- $3,000, Jon Gold, its vice president of supply chain and customs policy, told the House subcommittee.

“This represents a 38%-73% cost increase for directly affected cargo,” Gold said. “We are seeing some costs being passed onto the consumer now from the smaller and medium businesses.”

‘No shipping, no shopping’

Around 28% of the world’s container trade traverses through the Suez Canal/Red Sea. According to Bank of America, almost 30% of the goods in these containers are furniture, household goods and clothing and apparel. Its research indicates that brands with significant European exposure due to the longer transits from Asia to Europe include Phillips-Van Heusen Corporation, Birkenstock, Capri Holdings Limited, Nike, Ralph Lauren, VF Corp, and Levi Strauss & Co.

Rising freight costs were a big component of inflation during Covid and the Red Sea crisis has renewed fears that another bout of supply chain-triggered inflation could occur.

Gold said in addition to the freight rate hikes, additional surcharges are being applied not only to directly impacted cargo but to additional trade routes, such as Europe to the U.S., due to issues with the availability of containers. The longer transits are creating a dislocation of containers because they are in use longer. Gold said some retailers are taking their products to the air to speed up delivery of their goods, helping to explain why air freight volumes have recently soared.

Xeneta data shows that air cargo volumes on the major apparel route from Vietnam to Europe spiked 62% in the week ending January 14, six percent higher than 2023′s peak week in October. The same week 12 months ago showed a 16% increase.

Ralby stressed that the crisis in the Red Sea is not just a U.S. problem.

“The U.S. economy is represented but this is global,” he said. “No shipping, no shopping,” he said.

He warned that the Houthi attacks will impact prices throughout the consumer economy to a “far greater” extent than in the energy markets, citing the roughly 30% of global container traffic that traverses the Red Sea versus 10% of oil supply.

“Oil is fungible. It can be replicated from different shipments from all over the world. These purchases (in containers) you can’t make up for,” Ralby said.