By Aisha Ahmed, Rijul Mahajan, and Liwen Zhang
The Red Sea Crisis began on October 19, 2023, where Iran-backed Houthi militants began missile and drone attacks towards any cargo/container ship that had a connection with Israel. Such attacks have led to many changes within the global supply chain. This overall has moderately impacted the pattern of logistics within the United States. From increasing shipping costs, occurrence of shipping delays, to worries about the future possibilities of domestic changes with inland logistics and the economy, here’s what has happened in the United States since the Houthis attacks have happened.
Current Impact on Domestic Logistics
Shipping rates are experiencing a steady increase in prices in the United States due to the Red Sea attacks. As a result, these attacks are diverting containers to the longer route around Cape Town which is leading to a delay of ships delivering product to the U.S. (Figure #1). Thus, Weekly Vessel Schedule Reliability in Median Days Late, as shown by Project 44 (Figure 2), presents the increase in days delayed for shipments arriving around the world, including particularly the U.S. Despite that days of delays are leveling out in late January-February 2024 due to the consideration of additional transit becoming normalized, any future changes of re-routing can result in more of days for delays.
Map of container Ships Diversions from Red Sea to Cape of Good Hope
(Ships with capacity of 10,000 twenty-foot equivalent units or more)
(Figure #1- Source: Freight Waves)
Weekly Vessel Schedule Reliability-Median Days Late
Figure #2 - Source: Project 44
While initially the Red Sea crisis was being compared to COVID-19, the current situation is only partially comparable to the pandemic, says Freight Waves. Unlike COVID-19, there is no surge in demand, border regulations or extreme supply constraints. The disruption in shipping was initially caused by ships being in the wrong place or out of schedule. However, the situation worsened due to unfortunate timing, as many companies were attempting to import from China before the Chinese New Year closure, leading to tight ship capacity. While there is a need for additional ships due to the longer voyages and added days to a ship's route, this need is being met by the oversupplied market. While an excess of ships is usually unfavorable for container lines, in this situation, it offers increased resilience to handle disruptive events.
The latest data from Xeneta, as reported by CNBC, reveals a slight decline in container rates from $6,260 to $6,100 per 40-foot container between February 1 and February 15. Rates from the Far East to the West Coast dropped from $4,730 to $4,680 in the same period (Figure #3). This is good news that might suggest that we are headed for a steady few days. However, East Coast and West Coast spot rates are still up 146% and 186% respectively, as compared to December 14.
Daily Spot Rates for 40-foot equivalent units from East Asia to the U.S. ($US)
The Red Sea supports many industries which is why the effects of this crisis are being felt across various industries but mainly the automotive and energy sectors. Major energy companies like Shell and BP have suspended shipments through the Red Sea, leading to disruptions in oil supply. The additional transit time poses a threat for inventory levels and potential stockouts. Automotive companies such as Tesla, Volvo, and Michelin are facing severe impacts, with halted manufacturing due to delays in the arrival of containers which will eventually impact the US market, says project44. These disruptions highlight the vulnerabilities in just-in-time manufacturing models and the broader consequences on global supply chains and inflation. Companies are starting to identify critical categories and specific products where delays could cause significant operational disruptions. It's important to designate these items and maintain a safety stock that exceeds normal levels for several months. While this approach may raise storage expenses for companies, it serves as a safeguard against potential extended delays in logistics.
The rise in shipping rates is having a ripple effect in the stocks for shipping companies. Shipping stock prices (Figure #4) have also experienced a huge surge with shares of product-tanker owners Scorpio Tankers (NYSE: STNG) increasing by 16%, Torm (NASDAQ: TRMD) increasing by 15%, and Ardmore Shipping (NYSE: ASC) increasing by 11%, respectively, according to Freight Waves. Since containers have had to add multiple days of delay to their usual journey they cannot be prepared in time for their next journey, which is leading to a shortage of containers.
Shipping Stock Prices in the Wake of the Red Sea Attacks (%)
Figure #4 - Source: Freight Waves
Domestic Modifications
Despite all these changes it is still difficult to anticipate how big and long lasting of an impact the Red Sea crisis can have on domestic logistics. Initially companies were expected to avoid the East coast and prefer the West coast. However, Alan Baer, CEO of logistics company OL USA, has said that the data indicates a possible opposite as rates are also increasing for imported goods coming into the west coast. Particularly From December 2023 to January 2024, North Asia-Med rates increased from 2000 to 7000 as its routes are affected both by the Panama Canal and Red Sea Crisis (Figure #5).
Platts rate assessments (USD per FEU): Dec. 1-Jan. 25
Figure #5 - Source: (Chart: FreightWaves based on data from Platts)
Since 2024, global transport costs have soared (30% to 73%) and increased transit times. Inflation has dampened interest rates, which, combined with rising costs squeezing profit margins, has led to retailer ambivalence (after all, shoppers tend to blame retailers, not suppliers, for high prices). However, such a crisis is not just on the East Coast, but global. All of this is the result of a red ocean, and the only way to win is to solve the problem or get suppliers to make concessions and create more affordable solutions.
Inbound Price Index (International Services): Air Freight (Dec 2023-Jan 2024) (Index 2000=100)
Considering that airfreight is a safer and faster mode of transport, and that prices are likely to favor those in need of transport given the lull in air business after the pandemic, we have seen a 10% drop in the price of planes (Figure #6), which have become the best option for suppliers as stacking costs are very high and they need to make quick decisions. At the same time, the national airlines that have done the most business in the wake of the pandemic are keen to co-operate. In addition, the rising costs of various modes of transport, such as large containerized shipments, also prompted suppliers to look for changes.
Until February, airfares were still rising (Figure #7), however, because of the factor of the coming Chinese New Year, we can't use the Red Sea incident to summarize the increase in airfares in a nutshell. "However, WorldACD reiterated that it was "impossible" to measure the extent of the Red Sea impact on the cargo traffic because of the traditional strong seasonal demand ahead of Lunar New Year." In addition, between 2014 and 2018 (avoiding the epidemic), we have seen significant fluctuations in air ticket fares during the Chinese New Year each year, so with the February location of the Red Sea event, we are unable to see any more changes or speculate on more actual information for the time being.
Inbound Price Index (International Services): Air Freight (Sep 2014-May 2018) (% Change)
Lastly, as a result of the Red Sea incident, the continuation of large ships being detoured leading to longer transport distances and increased consumption of fossil fuels, which accelerated environmental damage and was not conducive to long-term development, contrary to the ESG concept.
Future Possibilities and Outcomes
Even though many changes have taken place due to the impacts taken on from the Red Sea, lots of future alterations for domestic logistics have been predicted too. According to ABC News, many are worried that the Red Sea attacks could potentially lead to an increase in inflation due to the rise in transport shipping costs. Regardless of how this claim might play out in Q2 through Q4 in 2024, the argument did not have strong support during 2023 by data presented from the U.S. Census Bureau. This data shows that the possibility of inflation due to increased costs is not likely because insurance and freight rates are only a small amount of value for top-shipped commodities in the United States. This is done through calculating a ratio of insurance and freight costs over import value (as shown by this LinkedIn post by Jason Miller), where most commodities were widely only 1% of the import value (Figure #8).
Top U.S. Imports from Asia Mapped to 5-Digit NAICS Codes: 2023 (Through November)
Figure #8 - Source: U.S. Census Bureau
Another example of why the Red Sea crisis will not and has not been affected by inflation is due to a normal rate for Domestic Trucking and Intermodal rail. As reported by Arie Ashe from the Journal of Commerce, shippers will save about 25-27% on rates due to truckload and Intermodal contracts not being affected by inflation (Figure #9). Domestic Intermodal shippers saved 17.5% in rates in the past year. Truckload contract rates even decreased from $2.12 per mile at the end of September 2023 to $2.03 per mile in December 2023, a 4.25% decrease. Contract rail rates also fell at 3.75% from $1.60 per mile to $1.54 per mile during the same time period. When looking at Spot truckload rates, there was a decrease during that same time period of 1.44% from $2.08 to $2.05. Meanwhile, spot intermodal rates declined 1.71% from $1.75 per mile to $1.72 per mile. Therefore, due to no changes in inflation coming from the Red Sea, intermodal rail and shipping is still running relatively smoothly in the United States. In short, there should be no worries about inflation coming from the Red Sea events due to its small likelihood of happening.
Truckload, intermodal contract rates in Q4 2023 (USD per mile)
Figure #9 - Source: JOC Intermodal Savings Index
While it may be predicted that U.S. import TEUs could possibly increase at the West Coast due to Red Sea Conflicts, imports rose 18% from last year to January 2024 at the Port of Los Angeles. In January 2024, 855,652 TEUs were shipped in while the Inbound Ocean TEUs Volume Index increased 115% (Figure #10). Verified by Freight Waves, such increases have happened because of inventories getting reloaded as well as preparations of bringing in imports early ahead of the Chinese New Year, where import demands went up by 10% before the holiday. Such increases in imports increase U.S. domestic transportation of rail and trucking of bringing products to the west coast to the rest of the U.S.
Inbound Ocean TEUs Volume Index (Port of Los Angeles, CA) (Feb 2023-24) (%)
Figure #10 - Source: Freight Waves
Nonetheless, the demand for domestic intermodal railroad transportation is increasing in the United States as well. As reported by Michael Baudendistel from Freight Waves, because of the rerouting that is taking place, where ship freight can possibly be brought to the West Coast due to cheaper rates and faster shipping routes compared to the East, this can increase rail intermodal volume by 65-70%. Currently, Railroad Intermodal Transportation for commodity goods has been increasing. The U.S. Bureau of Labor Statistics shared a recent steady rate for Railroad Intermodal Freight PPI of 215 in November and December 2023 (Figure #11), as U.S. Rail Intermodal Traffic sourced by Fred increased approximately 1.35% (Figure (#12). In other words, cheaper PPI for rail transportation or any PPI in general, leads to an increase in demand for the use of the goods/services. Conversely, the Census Bureau has also shown a recent increase in Rail Carloads (Figure #13), which is also due to Carloading prices becoming suitable for shippers' transport goods. Thus, it is very likely for shipping companies to begin using Rail transportation, especially from the West Coast, to transport goods domestically because the market is growing well. The use of railroad transportation also keeps many international containers safe from disruptions or getting lost due to them becoming domestic containers. With the assurance of domestic guidelines, such containers can benefit U.S. Transportation and logistics companies at the intermodal sector such as J.B. Hunt, Hub Group, and Schnieder.
PPI Industry data for Line-haul railroads-Intermodal freight rail transportation, not seasonally adjusted
Figure #11 - Source: U.S. Bureau of Labor Statistics
Rail Freight Intermodal Traffic by # of Containers and Trailers
Figure #12 - Source: Fred via U.S. Bureau of Labor Statistics
U.S. Rail Carloadings (2018 to Jan. 2024)
Figure (#13) - Source: Census Bureau
Particularly, there has been lots of discussion going on about an increase in future oil prices due to the Red Crisis conflict happening near the Middle East, where lots of oil tends to be exported around the world. Various projections including those from Project 44 report that the price of crude oil can rise from the current $68 per barrel to $80 per barrel, a 17.64% increase. However, fast forward to a few months after the Houthi attacks, there has only been a drop of crude oil prices as shown by the U.S. Energy Information Administration. From December 2023 to February 2024, the four-week average of U.S. imports for crude oil in thousand barrels per day decreased at 3.8% from 6630.60 to 6378 barrels (Figure #14). The reason behind the falling prices is due to a situation not correlated with the Red Sea Crisis but rather an oversupply of oil. Moreover, the January 2024 sum of train speeds for crude oil commodities look stable (Figure #15) as its slight decrease suggests that the price of U.S. gas has only increased due to warmer weather arriving (Figure #16), where consumers tend to drive more, creating higher demand for gas with its given supply. For that reason, it can be analyzed that future oil prices are not likely to be affected due to the Red Crisis, but rather normal patterns that occur in the market.
Figure #14 - Source: U.S Energy Information Administration
Figure #15 - Source: United States Department of Agriculture
Figure #16 - Source: U.S. Energy Information Administration )
Subsequently, the Producer Price Index (PPI) for General Freight Trucking, Long-Distanced Truckload shared by Fred through the U.S. Bureau of Labor Statistics, is decreasing due to lower fuel prices with a drop from 178.724 in November 2023 to 173.098 in January 2024, a 3.15% decrease (Figure #17). This low PPI tends to mean higher demand for truck transportation. With the Red Sea Crisis changing from sea freight to other modes of transportation, while there being the likelihood of goods to be imported to the U.S. by the west coast, domestic trucking can be predicted to grow more in the U.S. during 2024, especially with its low freight rates.
Monthly PPI Index of Freight Trucking (Index Jun 1992=100)
Figure #17 - Source: Fred via the U.S. Bureau of Labor Statistics
Even so, it’s not only the PPI that is helping trucking grow this year, but also new investments in trucking operations, where the Journal of Commerce reports that shippers are being supplied with new capacity and trucks. This can help create more efficient, timely domestic transportation for freight that is already coming into the U.S. delayed from ocean rerouting.
Conclusion
In closing, with the attacks that have occurred from the ongoing Red Sea Crisis, global supply chains had to perform many changes to stay away from the Suez Canal, which overall impacted the supply chain for many countries including the U.S. With rerouting of ships around Africa to the U.S., there has been longer shipping times, which increased shipping costs and resulted in delays. The change of transportation mode from sea to air freight has only increased demand and cargo rates for aviation. Companies within the U.S. had some inventory issues that are still ongoing. Lastly, there are lots of future possibilities for impacts towards inflation, along with predictions for what may happen to domestic intermodal rail, trucking, and oil prices. Nonetheless, as time passes in 2024, more affairs will be on the lookout for this issue.
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