Risk briefing: how to manage supply chain risks in the red sea

What happened?

Iranian-backed Houthis, who have formed the Houthi movement, officially known as Ansar Allah, is a Shia Islamist political and military organisation that is currently disrupting trade in the Red Sea by attacking commercial vessels.

The Houthi attacks on commercial ships, which began in November 2023, in have forced shipping companies to opt for the more expensive and time-consuming route around Africa.

Eric Chetwynd, Fusion Risk Management’s senior director of product marketing said: “This is significant because nearly 15% of global maritime trade uses the Red Sea – including for transporting grain, oil, and natural gas – and it is the only route to the Suez Canal, where a third of the world’s container traffic passes through.”

Research from Allianz Trade found that Red Sea is used for for 40% of Asia-Europe trade. Indeed, 12% of seaborne oil and 8% of liquefied natural gas (LNG) pass through the Suez Canal.

Since the end of December 2023, half of the container-carrying ships that pass through the Red Sea and Suez Canal have been avoiding the route due to the heightened threat of attacks.

These diversions are causing trips to take longer – approximately 25% longer according to recent reports – creating supply chain disruption which is increasing transit costs.

“If there is still an urgent need to get shipments moving, then businesses will have to pay an awful lot more to do so.”

Allianz Trade says that container freight prices have rocket by 240% since late November, adding that should this crisis drag on beyond the first semester of the year, the impact on global supply chains could become more severe.

Xeneta, the ocean and air freight rate benchmarking and intelligence platform, predicted rates could increase by 100%. Chief analyst Peter Sand said: “As we saw during the Covid years when there were huge disruptions in supply chains, if there is still an urgent need to get shipments moving, then businesses will have to pay an awful lot more to do so.”

“Shippers should be aware that rates on all major trades could be impacted – even if they ordinarily would not transit the Suez Canal. Ocean freight carriers will announce all kinds of ‘recovery cost surcharges’ even for trades which are only indirectly impacted.”

Chetwynd commented if the attacks continue, this could lead higher prices for a wide range of consumer goods, from clothing and coffee to oil and food.

What does it mean for global businesses and their risk managers?

Organisations that have exposure to the Red Sea through their supply chain should expect longer delivery times and increased costs for goods and oil. Risk managers must promptly prepare for these types of disruptions.

Stuart Swindell, third party risk & compliance strategy director at Dun & Bradstreet says: “Businesses must brace for more bottlenecks of essential supplies… Supply chain managers must ensure their businesses are nimble when disruption occurs, or better yet, able to predict and prevent problems.”

“Businesses must brace for more bottlenecks of essential supplies”

Chetwind adds: “Similar to the challenges faced during the COVID-19 pandemic, organisations that have not established redundancies within their supply chains are likely to encounter delays, disruptions, or difficulties in procuring essential components that are necessary for delivering goods and services.

“It is crucial for organisations to prioritise building resilience within their supply chains to mitigate potential risks and maintain operational continuity.”

What steps can risk managers take to mitigate the threats?

Organisations that rely on logistical routes in the Red Sea should assess alternative options – and swiftly.

If your business depends on suppliers using these logistical routes, you must proactively evaluate the criticality of those vendor supplies and determine appropriate mitigation steps.

This requires identifying geographic concentration within specific countries, regions, and logistical routes.

Chetwynd says: “Risk managers should conduct due diligence based on the role that each of those vendors and routes serve within their business’s operations. With this knowledge in hand, they can then determine appropriate mitigation steps.

“By leveraging data-driven insights to scenario plan and model outcomes, companies will be able to maintain stability” 

“For instance, in response to both COVID-19 and the geopolitical conflict in Eastern Europe, many organisations have taken steps to increase their inventory levels as a precautionary measure, recognising that onboarding new suppliers can be a time-consuming process.”

Swindell adds: “Any scenario planning must now include supplier diversification and an understanding of not just the businesses’ suppliers, but the suppliers’ supply chains.

“The current disruption in the Red Sea won’t be the only supply chain disruption this year, but by leveraging data-driven insights to scenario plan and model outcomes, companies will be able to maintain stability, navigate challenges, which can ultimately lead to a more resilient supply chain.”