Red Sea diversions hinder supply chains
• Can SA’s embattled ports improve their effficiencies to take advantage of additional seaborne traffic?
Importers are becoming well-versed in managing supply chain shocks and disruptions. In 2010, an ash cloud caused by the eruption of the Eyjafjallajökull volcano disrupted air travel across Western Europe.
In 2021, global supply chains were again disrupted when one of the world’s largest container ships, the Ever Given, got stuck in the Suez Canal, holding up nearly $60bn of trade. The wedged vessel held up more than 400 ships waiting to pass through the canal and disrupted global trade for nearly a week.
About 12% of global trade, about 1-million barrels of oil and an estimated 8% of liquified natural gas pass through the canal on a daily basis. Lloyd’s List, a UK-based source of news analysis and insight into the shipping industry, reported that the stranding of the Ever Given held up $9.6bn of trade along the canal each day. Freight costs in this period jumped 47%.
Less than a year later, the Covid-19 pandemic caused yet another significant disruption to global supply chains with stock becoming king.
The latest risk to global supply chains is the threat of Houthi attacks on container ships in the Red Sea. The Iranaligned Houthi movement in Yemen began attacking vessels in November 2023 in support of Palestinians in Gaza. As a result, many shipping companies have
stopped using the Red Sea which typically sees about 15% of global seaborne trade pass through it and are instead using the longer — and more expensive — route around southern Africa.
In January 2024, Danish shipping and logistics company Maersk, which originally continued to sail through the Red Sea, albeit under naval escort, suspended its Red Sea operations for its US-flagged vessels after two ships came under attack. The company said a third of its container volumes were impacted by Red Sea disruptions.
Shipping freight through the Suez Canal had dropped by 45% by January 2024, according to the UN Conference on Trade and Development (Unctad). The organisation reported that 39% fewer ships were transiting the Suez Canal. Reuters reported that freight container volumes through the Red Sea region had fallen by about 78% from expected values in January.
In total, three global trade routes are now disrupted with the Red Sea disruptions adding to disruptions to the flows of grain and oil from Russia and Ukraine and low water levels in the Panama Canal which saw shipping reductions of more than a third. Not surprisingly, longer sailing rates have raised freight prices.
The International Monetary Fund (IMF) says commercial seaborne traffic around the Cape is up by 70%.
Dr Greg Cline, head of corporate accounts at Investec Business Banking, estimates that roughly $200bn of trade has been diverted from the Red Sea alone. “The cost of these diversions, coupled with increased fuel costs and higher insurance premiums, will potentially have a knock-on effect on consumers in the months to come.”
The diversions via southern Africa, says Cline, offer an opportunity to southern African ports. The big question is whether South African ports can improve their efficiencies in time to benefit from these opportunities. In November 2023, backlogs outside the Port of Durban reached a crisis point when about 79 vessels carrying more than 61,000 containers waited for up to two weeks to dock as a result of operational challenges, equipment failures and bad weather. The Port of Cape Town reported similar logistical constraints at its Container Terminal.
SA’s ports are consistently ranked as among the most inefficient ports globally by the World Bank’s Container Port Performance Index. These inefficiencies come at a significant cost to the economy. Fruit exports in November and December 2023 were 35% down from the same period in 2022.
Neighbouring countries are stepping in to the breach left by SA’s inefficient ports with both Walvis Bay and Maputo reporting increased volumes of ships. The Maputo Port Development Company reported that volumes were up 16% in 2023, compared to 2022. It is planning a $2bn expansion project to boost port capacity in response to growing volumes of exports from SA. The Namibian Ports Authority is planning a $2.1bn port investment programme which includes expanding the port at Walvis Bay and establishing a port at Luderitz to service SA’s Northern Cape mining industry.
“SA urgently needs to make the necessary investments into its ports to ensure they improve their efficiencies to handle increased ship and container volumes,” says Cline.
South African importers have tended to hold higher inventory levels ever since the Covid-19 pandemic disrupted supply chains. More recently, constraints and delays at SA’s ports have held up the delivery of imported stock. These delays, says Cline, are having an impact on importers with a greater proportion of their cash flow tied up in stock for longer. This tends to impact their cash flow requiring trade finance.
“Banks, including Investec, have started offering longer payment terms to help importers navigate this challenge,” he says.