Chinese exporters are feeling the pinch of rising shipping costs due to Red Sea terrorist attacks by the Iran-backed Houthis of Yemen, to the point that Premier Li Qiang made an oblique reference to the crisis in his speech to the World Economic Forum (WEF).
Li stressed the need to keep the world’s supply chains “stable and smooth” in his remarks to the WEF last week and there is no bigger problem facing supply chains at the moment than the virtual shutdown of the shipping route through the Red Sea and Suez Canal – a route that carried almost 13 percent of global shipping at its peak.
Reuters on Sunday quoted Chinese exporters who said higher costs and longer shipping times due to the Red Sea blockade have “wiped out our already thin profits,” as automobile exporter Han Changming put it.
“Some companies, such as U.S.-based BDI Furniture, have said they are relying more on factories in places such as Turkey and Vietnam to mitigate the impact of the disruptions, adding to recent moves by Western countries to reduce dependence on China amid geopolitical tensions,” Reuters noted.
The Houthis on Friday promised safe passage for Russian and Chinese ships, but this pledge means little to a massive export market that cannot rely entirely on Chinese-flagged ships to haul its cargo.
China may have underestimated just how much its export market relied on that Red Sea shipping route, which provided fast and cheap service between Asia and Europe. With costs tripling or quadrupling, and weeks added to shipping times because nervous companies must divert their vessels around the Cape of Good Hope, buyers in the West are turning to alternative suppliers.
Some analysts believe the shift in supply chains will be permanent, even if the Houthis stop attacking cargo ships tomorrow, because Western companies were already looking for alternatives to China and, after the Houthi crisis, they will never be comfortable with putting their vital supply lines at the mercy of Iran and its proxy forces again.
Some Chinese exporters are so nervous about the realignment of global shipping that they are reportedly already making plans to lay off workers to account for permanently lost business. On the other end of the Suez Canal, small companies whose business models were based on low-cost “just in time” shipping are struggling to make ends meet.
Marco Castelli, founder of a company called IC Trade that exports Chinese mechanical parts to European buyers, told Reuters that the general public notion of companies simply raising prices a little and dealing with some backorders to get through the Red Sea crisis is mistaken. On both sides of the Red Sea supply chain, exporters and importers built companies with very thin profit margins on the assumption of cheap, fast shipping, and they cannot survive without it.
Castelli pointed out that China’s factories usually are not paid until buyers in the West receive their shipments, “so if their payment is delayed, they can’t pay their suppliers, they can’t pay their workers.”
The South China Morning Post (SCMP) pointed out on Monday that Lunar New Year usually puts enormous stress on supply lines and there is nowhere near enough rail and air capacity to make up for a 30-percent reduction in cargo passing through the Red Sea. China has been pushing Western importers to consider its railroad lines as an alternative, but in addition to its slower speed and higher cost, those railroads are risky because they run close to the Russia-Ukraine conflict zone.
The Wall Street Journal (WSJ) said shipping disruptions are beginning to create “ripples across supply chains in Europe and the U.S.,” including cost increases in shipping lines that do not even run through the Red Sea. Consumers at the far end of the supply chain have been largely protected from the cost increases so far, but that would likely change if the disruptions continue beyond the Lunar New Year holiday season.
China’s state-run Global Times, on the other hand, claimed the impact of the Red Sea crisis is already “gradually diminishing” because demand is slipping and keeping prices from skyrocketing further.
That relief will probably only be temporary, as the Global Times conceded, because the next surge of shipping demand is due in March. If the Houthis continue to disrupt shipping after March, shipping analysts said higher rates will become locked in, and consumers are likely to begin feeling the pinch.
