By Abeeha Zaidi, Numair Haq and Seohee Kim
The Red Sea crisis has significantly impacted various industries worldwide, sparking changes in global trade and highlighting vulnerabilities across different sectors. This research article explores how industries such as energy, automobiles, pharmaceuticals, telecommunications, food & beverage, and fashion & retail have been affected. By studying the challenges each sector faces due to geopolitical tensions, we aim to provide insights into navigating this complex situation. This analysis aims to help policymakers, industry leaders, and stakeholders better understand the implications of the Red Sea crisis on these vital sectors.
Fashion & Retail
The fashion and retail industry relies on efficient transportation routes to meet the demand of the market in the United States. India, Bangladesh, Pakistan, Indonesia, and Malaysia are key exporting countries in the apparel market. The Red Sea crisis has disrupted the efficient trade routes the Asian countries have been utilizing for global trade. Furthermore, these countries are the top clothing manufacturing countries in the world. From January 2023 till November 2023, these countries collectively have imported a total of 2,685,872,860 kilograms of apparel and apparel accessories into the United States.
Asia Apparel Imports vs Containerized Vessel (kg)
(Data: US Census Bureau )
Beyond apparel, the disruption has extended its reach to the materials used in the manufacture of clothing, affecting the entire fashion supply chain in the United States. Pakistan, Bangladesh, Indonesia and India are major exports of a variety of fabrics, textile furnishings, and apparel accessories. With the longer lead times in delivery, companies and suppliers must work together to minimize the crisis’ effects on the distribution and production schedules.
The rerouting disruptions to apparel and apparel accessories has directly affected fashion brands in the United States. According to WSJ, 25% to 30% of Urban Outfitter’s apparel comes from Pakistan and India. Abercrombie & Fitch also uses the Suez Canal to deliver apparel from India, Bangladesh, and Sri Lanka. As reported by Bloomberg, the company sent out an email regarding shifting from containerized vessels to air freight transportation. Furthermore, the graph by Reuters Graphic presents the number of containerized vessels from U.S. retailers that transport through the impacted Suez route. Target owns the highest number of containerized vessels, a total of 1,574. The route of Suez Canal has impacted the imports of garments, plastic, toys, and bath products for Target. Asian countries are key suppliers in the business model of Target, Walmart, Adidas, and Nike. In the midst of these challenges, fashion and retail brands are forced to reassess their supply chain.
(Source: Reuters Graphic)
Automobiles
After the nationwide chip shortage in 2021, automakers have become more adaptable and resilient to severe supply chain disruptions. According to kkb.com, Volkswagen states “rerouting shipments of car parts around South Africa instead of through the Suez Canal last month”. However, adapting to the situation is something Volkswagen states it has learnt from history already incorporating the effects of longer shipping process into schedule. In addition to incorporating effects, automakers like Stellantis have switched to relying on air freight for some parts and experienced “almost no impact on manufacturing date”.
The adaptation of companies and the lack of impact in comparison to 2020 and the 2021 chip shortage is visually seen in the following graph measuring the last 5 years of industrial production of motor vehicles parts:
Industrial Production of Motor Vehicles and Parts (Index 2017=100)
Though there are no major production impacts on non-electric automobiles, electric vehicles are seeing greater impacts due to Red Sea disruption. Tesla has suspended production in their Germany factory since January 29 and reported till 11 February, which according to Elon Musk can lead to about 5,000 to 7,000 car loss in production. Tesla toke this action as the Red Sea connects battery component suppliers in China to Europe leading to as least 10 days of loss when making a detour around Africa and the Cape of Good Hope.
Also, China’s Geely owned Volvo car’s output at its plant in Ghent in Belgium is currently suspended due to shortage of components. Geely also warned that they expect Europe EV sales to be impacted due to route delays and expenses of shipping. The cost of a 40ft container travelling from China to Northern Europe has increased from $1,500 in November 2023 to more than $4,000 by mid-January 2024, Offshore Technology reported.
In summary, automakers have effectively adapted to supply chain disruptions, employing strategies like rerouting shipments and air freight to maintain production. However, the electric vehicle sector, as seen with Tesla and Volvo, faces distinct challenges due to its specialized supply chain, highlighting the need for continuous innovation in automotive logistics.
Food & Beverage
The Red Sea crisis has had widespread effects across various industries, including the food and beverage industry. From Pakistan, India, Bangladesh, and Indonesia, the United States imports a significant amount of fresh fish, exotic fruits, and tortilla products. The main method of transportation for these commodities has been by containerized vessel by sea. However, the disruption caused by the Red Sea crisis has disrupted the efficient global trade routes, presenting considerable obstacles for suppliers and consumers.
Container Routes
(Source: S&P Global)
As shown in the map from S&P Global, ships have been rerouting to navigate around the Cape of Good Hope adding an extra 3,500 miles to the transportation journey of Asian global trade. The extended transit has had consequences of these perishable food products that compromise the quality and freshness upon arrival. The impact of transportation for perishable food products has been substantial to the fresh fish, exotic fruits, and tortilla products. For suppliers, maintaining the quality and freshness of goods during extended transit time has become a significant challenge.
Delay in transit and rerouting has directly impacted companies, including Keurig Dr. Pepper, McCormick & Co, Tyson Food, Hormonal Goods, and Pilgrim’s Pride. Keurig Dr. Pepper, for instance, sources its brewers from Asia, while McCormick & Co. relies on spies from countries like India and Indonesia. In response, companies have been exploring innovation strategies to alleviate the effects of this crisis to their supply chain. .
Pharmaceutical and Medial Products
The pharmaceutical industry faces unique obstacles with imports from the Asian Subcontinent. Pharmaceutical products from India, Pakistan, Bangladesh, Malaysia, and Indonesia consistently rank in the top 10 imports to the United States from those countries. However, the key difference lies in how these products are transported: either by air or by sea. This difference will determine the type of effect that the Red Sea Crisis will have on industry.
Examining the maritime and aerial logistics between India, Indonesia, and Bangladesh reveals a noteworthy trend. While both countries offer transportation options via sea and air routes, Indonesia and Bangladesh predominantly rely on maritime imports over air transport. This preference can be attributed to Indonesia and Bangladesh’s cost of pharmaceutical products being lower relative to countries that export more by air (such as India). India has a value of $148.7 per kg for goods imported by air, which is much greater than the $81.7 per kg and $29.17 per kg for goods imported by sea from Indonesia and Bangladesh. Indonesia imports around $1 billion worth of Pharma products by sea, over 3 times greater than the mere $300 million worth of products by air. Bangladesh imports $15 million worth of products by sea, substantially greater than the $1 million worth of products by sea. India on the other hand imports $5.1 billion worth of products by air and $5.1 billion worth of products by sea as well. Pakistan, Bangladesh, and Indonesia import $29 million, $12 million, and $45 million worth of products primarily by air.
Air Customs Value vs Containerized Vessel Value ($US)
Data: Census Bureau
Pharmaceuticals & Medicines: Air Customs Value vs Containerized Vessel Value (%)
Data: Census Bureau
The maritime disruption caused by the Red Sea crisis is anticipated to significantly impact pharmaceutical product exports from key South Asian nations, particularly Bangladesh and Indonesia. With these countries relying heavily on sea transportation, substantial increases in lead times and transportation costs are expected. This necessitates exploration of alternative routes to mitigate potential disruptions by Houthi Rebels. Conversely, Pakistan, India, and Malaysia are expected to experience lesser effects due to their predominant use of air freight for pharmaceutical shipments. However, the heightened demand for air freight post-crisis may lead to elevated costs, potentially affecting shipment volumes, albeit to a lesser extent compared to India and Indonesia.
Technology & Telecommunications
In the realm of communications equipment importation from South Asia, the primary source countries are identified as India, Indonesia, and Malaysia. Imports from Pakistan and Bangladesh remain minimal, amounting to less than $75,000 worth of products transported by air and no reported imports via sea. Notably, India and Malaysia predominantly opt for air transportation for their shipments, while Indonesia relies significantly on sea freight once again, with a reported $1 million worth of products transported by sea, in contrast to a mere $160,000 via air. This variance in shipping methods can once again be attributed to the notable disparity in the value of products shipped from these respective countries. For instance, telecommunication products imported from Indonesia by sea are valued at $72.9 per kilogram, markedly lower than the value of products imported from India by air, which stands at $1172.7 per kilogram.
Air Customs Value vs Containerized Vessel Value ($US)
Data: Census Bureau
Communications Equipment: Air Customs Value vs Containerized Vessel Value ($US)
Data: Census Bureau
The telecommunications industry in key South Asian nations, notably Indonesia, faces significant challenges due to the maritime disruptions caused by the Red Sea crisis and has a similar outlook to that of the pharmaceutical industry. Indonesia's heavy reliance on sea transportation could result in substantial delays and increased costs for exports. Again, exploring alternative shipping routes is crucial to mitigate potential disruptions by groups such as the Houthi Rebels. India and Malaysia, with their preference for air freight, are expected to be less affected. Nonetheless, the surge in air freight demand post-crisis may still lead to higher costs, but to a lesser extent compared to Indonesia. All nations must take proactive measures to address potential logistical hurdles arising from the Red Sea crisis.
Energy
Currently one of the biggest concerns has been regarding oil imports being impacted by the Red Sea. However, the oil shipments have been stable so far even though some oil companies have suspended the Red Sea and Bab al-Mandab strait. Roughly 7 million-8 million b/d of crude oil and products transited the Red Sea in recent months, according to S&P Global data.
U.S. Field Production of Crude Oil (Thousand Barrels per Day)
(Source in: U.S Energy Information Administration (EIA))
There is no impact on oil prices or instability in the United States due to the high production of oil domestically. As shown in U.S Energy Information Administration (EIA), graph above, since 2010 the production of oil has more than doubled. Overall, the U. S’s oil dependency has decreased, oil’s share of total energy supply has dropped from about 50% in 1973 to 30% now. In 1973, the world consumed a barrel of oil for every US $1,000 of GDP. By 2019, it was only consuming 0.4 of a barrel for the same (inflation-adjusted) level of output.
U.S Petroleum imports: total, and from OPEC, Persian Gulf, and Canada, 1960-2022
(Source in: U.S Energy Information Administration (EIA))
Since impact is mostly regarding imported oil, looking at the imports overall the U.S has already decreased its dependence on oil imports from OPEC and Persian Gulf with an increase dependency on Canadian oil imports. As the Red Sea disruption furthers the decrease of oil imports from Middle East, Canada plans to increase exports to the U.S. According to WSJ, “Canadian oil companies will soon have the option to ship crude through a long-delayed, 715-mile pipeline expansion to the Pacific Ocean. That will allow traders to sell more oil to the U.S. West Coast and to fast-growing Asian economies.”
In addition to the oil being imported, insurance costs are increasing according to S&P Global Commodity Insights Red Sea insurance issued could add about $1/b or more to voyage costs, along with the increase in costs that come with rerouting such as voyage length, in-transit times and fuel costs. Routes have been disrupted and alternative routes have been found, for oil specifically the following is an alternative route according to S&P Global:
(Source: S&P Global)
Looking domestically in the United States we are obviously not facing too much of an impact because of the disruptions, however internationally the story is different, specifically Europe. European refiners are hurt by the increased shipping times and driving costs from 80% from Middle East, especially within their crude. “The volume going to Europe from the Middle East nearly halved to about 570,000 barrels per day in December from 1.07 million bpd in October, Kpler data shows.” according to Reuters.
Despite concerns over oil imports due to Red Sea disruptions, the U.S. has maintained stability in its oil supply and prices, thanks to its decreased dependence on imported oil and increased domestic production. While the situation poses challenges for international markets, particularly Europe, and raises shipping costs, the U.S.'s strategic shift towards more diverse and domestic energy sources, along with Canada's plans to increase exports, positions it well to navigate current and future disruptions with minimal impact.
Conclusion
In the current update on the Red Sea situation, ongoing disruptions continue to create challenges across various industries globally. The fashion and retail, food and beverage, and pharmaceuticals industries were the most affected by this crisis. In contrast, industries with less dependency on transportation, such as technology and telecommunications, have faced comparatively minor impacts. The possibility of further escalation of this crisis could intensify existing disruptions, leading to longer lead times, increased prices, and heighten the impact on businesses worldwide. While historical closures of the Suez Canal, such as in 1956 and during the Egypt-Israel conflicts, did not have immense impacts, the present situation calls for attention due to its potential to affect the trade routes. Businesses must plan for proactive measures and strategies to alleviate risks to stay competitive in their markets.
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