The Red Sea crisis has increased insurance premiums and fuel costs, putting financial pressure on Vietnamese exporters and potentially affecting their global competitiveness, according to Dr Irfan Ulhaq, lecturer in logistics and supply chain management, RMIT Vietnam.
Recent attacks on cargo ships in the Red Sea by Houthi militants have led to a significant re-routing of global shipping. Avoiding the region has necessitated detours, lengthening shipping times and escalating shipping costs and insurance premiums.
The Suez Canal, a linchpin in international shipping that caters for 12-15% of global trade, has witnessed a drastic 67% decline in container ship transits compared to the previous year, according to a UN report.
Essential commodities are feeling the pinch. Wheat shipments via the Suez Canal have plummeted by nearly 40%, and robusta coffee futures have surged to a 16-year high as traders scramble for supplies.
Dr Majo George, RMIT senior lecturer in logistics and supply chain management, said that the Red Sea crisis has sent shockwaves through global supply chains.
North American supply chains, for instance, are grappling with heightened shipping rates for routes from North Asia to the U.S. East and West coasts. The Panama Canal, another critical trade conduit, is also struggling with challenges, exacerbating the overall supply chain strain.
“Globally there has been an increase in transportation costs and a critical shortage of empty containers. These factors and extended transit times have affected the capacity to fulfil import-export orders,” Dr George said.
“The escalation in transportation costs and oil prices is likely to trigger a domino effect, influencing the prices of various goods and leading to broader economic and geopolitical instability.”
Dr George believes that the recent disruptions in the Red Sea are leading to significant challenges for Vietnam's key economic sectors, industries, and trade activities. However, the magnitude and specifics of the impact can be complex and multifaceted.
Trade activities with Europe and North America, which together made up 28.4% of Vietnam's total import-export value in 2023, are expected to feel serious impacts.
Due to the conflict, shipping companies have rerouted their vessels to avoid the Suez Canal, opting for longer routes around the Cape of Good Hope. This change has extended the journey by approximately 10 to 15 days compared to previous schedules.
Dr Irfan Ulhaq remarked that the extended shipping routes effectively double the shipping capacity required for Asia-Europe shipments, leading to capacity constraints and higher freight rates.
According to the Vietnam Maritime Administration, freight rates from Vietnam to the U.S. East Coast surged from $2,600 per container in December 2023 to $4,100-4,500 per container in January 2024, an increase of 58-73%. Freight rates to European markets also recorded sharp increases, with rates to Hamburg (Germany) nearly tripling between December 2023 and January 2024.
“The conflict has increased insurance premiums and fuel costs, adding financial pressure on Vietnamese exporters and potentially affecting their global competitiveness,” Dr Ulhaq said.
“Industries reliant on just-in-time supply chains or perishable goods are particularly vulnerable to disruptions. Delayed imports of raw materials and components can significantly hinder production schedules,” he added.
The ongoing disruptions might prompt Vietnam-based businesses to re-evaluate their supply chains, exploring more secure but potentially costlier trade routes. This could prompt a shift towards near-shoring or re-shoring strategies to bring production closer to key markets, although such transitions come with challenges and higher costs.
Among other targeted measures, Dr Ulhaq observed that businesses are looking at stockpiling key components or finished goods to buffer against disruptions, although this requires careful inventory management to avoid excess costs.
“Adopting flexible operations, including adjusting production schedules, product lines, and delivery methods, is crucial for responding to supply chain disruptions.
"Embracing advanced technologies like AI and blockchain can also enhance supply chain management by offering better efficiency, predictability, and transparency,” said Dr Ulhaq.
Both RMIT academics advocated for collaboration among logistics providers, governments, and other businesses to share risks and develop joint solutions, including policies that secure and stabilise crucial trade routes.
According to Dr George, the Red Sea and Suez Canal disruptions underscore the interconnectedness of global trade and the need for countries like Vietnam to remain agile and responsive to global shifts.
“While the direct impact on Vietnam's economy might take time to become clear, the overall situation highlights the need for innovative solutions and strategies to mitigate these challenges and maintain a competitive edge in the global market.”