The Largest Diversion of International Trade
A series of missile, drone, and hijacking attacks targeting civilian ships in the Red Sea over the past two months has resulted in the most significant disruption to international trade in decades, leading to increased expenses for shippers across Asia and North America. These attacks, carried out by Houthi militants following the Israel-Hamas war, have led to the most significant diversion of international trade in decades. Despite retaliatory strikes by the US and its allies and multinational naval operations, the assaults persist, causing sailors to demand higher pay and insurance rates to skyrocket. Shipping lines are avoiding the Red Sea, a waterway that typically handles 12% of the world's seaborne trade. As a result, more than 500 container ships are diverting their routes, adding two weeks to their journeys around the Cape of Good Hope. This diversion affects about a quarter of the world's container shipping capacity, leading to increased costs for shippers globally. The economic impact is spreading, with fears of broader fallout and disruptions expected to last for months.
Shipping lines and oil carriers anticipate the upheaval to persist for months or more, with companies facing increased inventory tied up in transit. There is an economic impact on various industries, including automotive and retail, with companies like Volvo, Tesla, Tesco, and Marks & Spencer announcing production suspensions or flagging the risk of higher costs. The longer the disruptions continue, the wider the economic repercussions. Central bankers are warning of potential risks to inflation, and economists forecast an increase in global goods inflation if the shipping crunch persists. Despite assurances from the Houthis that certain ships won't be targeted, there are instances of accidental strikes, underscoring the unpredictability and complexity of the situation. As the world's largest trading nation heavily reliant on Middle Eastern crude oil imports, China has opted to stay clear of the Red Sea conflict. The Houthis have given assurances that Chinese vessels won't be targeted. This geopolitical scenario, exacerbated by the disruptions in the Red Sea, serves as a stark reminder of the vulnerabilities still present in the global supply chain since the onset of the pandemic. (Source: Enda Curran, Jana Randow, and Alex Longley)
Dunavant Solution: Dunavant offers supply chain consultation to review a customer's overall flow of goods. A few services include network design and optimization, logistics and transportation management, technology integration, risk management, and performance measurements and KPIs. Contact us at https://www.dunavant.com/supply-chain-management.
Air Freight Volumes Continue to Soar
The ongoing crisis in the Red Sea has led to extensive diversions for ocean cargo vessels. This has, in turn, resulted in a significant surge in air freight volumes. Companies, particularly those shipping cargo to Europe, increasingly opt for air transport to avoid lengthy detours around Africa's Cape of Good Hope. The spike in air freight usage, typically quieter during late December and early January, is causing anxiety among businesses. Air cargo volumes on the major apparel route from Vietnam to Europe spiked 62% in the week ending January 14. The current data indicates a remarkable increase in air cargo volumes, with flights already operating at 93% capacity and the potential for further rate hikes if the demand persists.
Comparisons are being drawn to the supply chain shocks experienced during the pandemic, with notable differences such as the return of passengers and a lower overall consumer demand. Unlike the pandemic, the current spike in demand is driven by companies needing to expedite product movement to mitigate delays in ocean transit. The crisis has particularly impacted the Suez Canal route, through which around 28% of the world's container trade flows. Notably, Bank of America identifies brands with significant European exposure, including Phillips-Van Heusen Corporation, Birkenstock, Capri Holdings Limited, Nike, Ralph Lauren, VF Corp, and Levi Strauss & Co, as potentially affected by longer transits from Asia to Europe. "We are definitely seeing the conversion to air freight for anything from fashion apparel to automotive parts," said Brian Bourke, global chief commercial officer for SEKO Logistics. "It's not quite Covid times where we were shipping hot tubs via air freight, but the additional delays, combined with the rush before Lunar New Year when factories shut down, has created a sense of urgency for many European importers that do not want to be left without stock or with factories idle for too long." (Source: Lori Ann LaRocco)
Dunavant Solution: In response to the escalating challenges in sea shipments due to the Red Sea conflict, see if air freight is the right solution. Dunavant's air freight services provide a swift and secure alternative for at-risk shipments. Contact us at https://www.dunavant.com/global-services.
US Domestic Logistics 2024
In 2024, the outlook for the logistics industry is shaped by various factors, including geopolitical, socioeconomic, regulatory, and weather disruptions. The first half of 2023 witnessed a decline in full-truckload rates, reaching 7-year lows due to excess capacity and weak demand. However, the second half showed signs of recovery with rising tender rejection rates and improving load-to-truck ratios, leading to rate stabilization. The logistics landscape in 2024 is expected to experience a shift in the full-truckload market, with potential rate increases attributed to decreased capacity and increased demand fueled by economic growth and continued e-commerce boom.
Key strategies for companies in 2024 involve building strong relationships with reliable carriers, leveraging technology such as freight procurement platforms, and exploring green logistics options to reduce costs and enhance brand image. Continuous monitoring of market trends, fuel prices, and regulatory changes, along with adaptability to alternative solutions, is crucial to optimize costs and maintain competitiveness. In the parcel sector, rates have consistently increased, with major carriers implementing substantial rate hikes in January 2024. Despite these increases, factors like the e-commerce boom and potential economic slowdown could influence pricing dynamics. Overall, cost management remains a top priority for the logistics industry in 2024, necessitating strategic thinking and proactive measures across all transportation modes with the aid of modern, AI-powered technology platforms. (Source: Bart De Muynck)
Dunavant Solution: If you are looking for domestic freight expertise to help you navigate and adapt to the shifting full truckload market, contact us at https://www.dunavant.com/domestic-services.
Korean Peninsula Risk
The past three years of geopolitical events and potential future scenarios are weighing on supply chains that could further disrupt ocean trade. The Russia-Ukraine conflict, the Israel-Hamas war, and the possibility of conflicts in the Middle East, Venezuela, China-Taiwan, and North Korea are highlighted as potential threats. A notable concern is the increased risk of North Korea engaging in military actions. Experts, including former CIA analyst Robert Carlin and nuclear scientist Siegfried Hecker, warn of the heightened danger on the Korean Peninsula, suggesting that North Korean leader Kim Jong Un may have strategically decided to go to war. This is underscored by North Korea's substantial nuclear arsenal, capable of reaching South Korea, Japan, and Guam. The impact of a war in the region on ocean shipping is significant, given the substantial roles of South Korea and Japan as major exporters and key contributors to global shipbuilding production.
The U.S. imports a significant amount of containerized goods from South Korea and Japan. According to Census Bureau data, the U.S. imported 7.46 million metric tons of containerized goods from South Korea in 2023, valued at $51.3 billion. America's imports from South Korea were led by motor vehicles, vehicle parts, electrical equipment and components, household appliances, chemical products, and general-purpose machinery. Imports from Japan totaled 4.47 million tons in 2023, valued at $53.8 billion. The U.S. import list from Japan included vehicle parts, chemical products, farm and construction machinery, engines, turbines, power transmission equipment, and electrical equipment and components.
The importance of South Korea and Japan in global shipbuilding is also of note, with South Korea accounting for 26% of newbuilding tonnage delivered in the previous year. Japan accounted for 14%. China led the market by far, delivering 51% of the new tonnage in 2023, with the remaining countries' yards delivering just 9%. The hypothetical threat to shipbuilding is considered a major variable for the broader shipping industry, with potential implications for future freight rates. ( Source: Greg Miller)
US-Mexico Outlook for 2024
In 2024, there is a notable expectation of increased trade between the United States and Mexico, particularly in the realm of cross-border freight. Shippers are keen on exploring nearshoring opportunities, driven by a desire to return to normal freight seasonality amidst uncertain economic conditions. Sri Laxmana, Vice President of Americas at C.H. Robinson emphasizes Mexico's attractiveness due to its proximity to the United States. The concept of nearshoring has gained traction, with nearly 40% of shippers having already taken advantage of it or considering doing so, according to a 2023 shipper survey by C.H. Robinson. Factors contributing to the shift from Asia to Mexico in supply chains include risk mitigation, favorable conditions under the United States-Mexico-Canada Agreement (USMCA), and a skilled workforce.
The automotive industry is expected to play a significant role in this growth, with investments continuing, though the availability of raw materials remains a crucial factor. C.H. Robinson's significant investment in a 400,000-square-foot distribution facility in Laredo, Texas, reflects the company's confidence in the expanding commerce between the U.S. and Mexico. Additionally, other developments include 5 Texas hydrogen fuel stations receiving a $70 million grant, the construction of a $400 million automotive manufacturing facility by Shanghai Unison Aluminium Products Co. in Mexico, and a $1.5 million grant for expanding logistics capabilities at the TexAmericas Industrial Park in northeast Texas. These developments underscore the region's dynamic nature of trade, logistics, and manufacturing. (Source: Noi Mahoney)
Dunavant Solution: As companies make the move to near shore in Mexico, reach out to the Dunavant CBMX team for freight and consulting needs. Contact us at https://www.dunavant.com/usmexico-operations
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