[+] Red Sea Conflict Raises Supply Chain Questions

The Middle East is on fire. And as Israel’s war on Gaza pushes into its fourth month, each week sees the conflict escalate and spread, with regional countries and proxy armed groups increasingly targeting each other. At 13,900km away, Australia continues to escape the worst of the political and economic fall-out. But it’s not that distance that has industry analysts concerned. Rather, it’s the 26-km wide stretch of water between Djibouti on the Horn of Africa and Yemen at the southern end of the Arabian Peninsula, known as the Bab el-Mandeb Strait. Also known as the Gate of Grief, it connects the Suez Canal and the Red Sea to the Gulf of Aden, and by extension the Indian Ocean. About 12 per cent of global trade, worth more than $1.5 trillion, passes through it every year. In the past month, Houthi rebels in Yemen, backed with Iranian weaponry, have repeatedly attacked shipping in the Red Sea in retaliation for the rising death toll among Palestinians in Gaza. Warships from the US and Britain have struck back, hitting Houthi targets in Yemen. ▲ US and UK warships have attacked Houthi targets in Yemen. Source: US Navy “It’s going to have an impact on us,” Altus Group president of cost and project management Niall McSweeney says. McSweeney is referring to announcements last month by the world’s biggest container shipping companies they would no longer traverse the Red Sea. Instead, European shipments are taking the longer route around South Africa’s Cape of Good Hope, adding about 10 days to the journey to Asia, and up to $1.5 million more for crewing and bunker fuel. That decision made by most shipping companies and certainly the biggest—the Swiss-Italian firm Mediterranean Shipping (MSC), Denmark’s Maersk, France’s CMA CGM and Germany’s Hapag-Lloyd—has driven up container shipping rates between Europe and Australia. “There are some specific, niche materials that come from Europe,” says McSweeney, “including high tech that comes out of Germany, like building management systems and key componentry.” Australia also imports timber beams and cross-laminated timbers from manufacturers, many of whom are in and around Central Europe. The Port of Melbourne—Australia biggest port for containers, motor vehicles and general cargo—says 32 per cent of sawn-timber arriving in the port came from Europe. ▲ Attacks on shipping in a narrow strip of the Red Sea—just 26km wide—between Djibouti and Yemen is threatening global supply chains. According to a port spokesperson, of the 3.23 million TEU (Twenty-Foot Equivalent Unit) containers that arrive in Melbourne every year, about 13 per cent come from Europe. Within the construction industry those containers bring lifts, exterior cladding, floor laminates and some types of tiles, marble and other exotic stone, as well as carpeting from countries including Germany, Italy, Belgium, Netherlands and France. But what is saving Australia, for the time-being at least, is that the country’s biggest suppliers of construction materials are China, the US and south-east Asia. “We’ve not seen any great volatility come through yet as a result of what is happening in the Red Sea,” says Barry Laycock, a director with cost management and quantity surveying practice Slattery. “And I’m not surprised by that,” he says. “A lot of our supply chain comes from Asia. “Until we become heavily reliant on European components, I’m not sure it's going to necessarily shift the bar in terms of pricing.” ▲ About 12 per cent of global sea freight travels through the Suez Canal and the Red Sea. Xeneta, the Oslo-based global ocean and air freight market analytics platform, says the rates for shipping containers between Europe and Asia-Pacific have risen by 243 per cent since the Red Sea crisis escalated in mid-December. Maersk told customers diverting ships around the Cape of Good Hope was “a necessary step in the interest of safety, but it has ultimately brought about increased costs for carriers”. “As such, Maersk is invoking Clause 20(a) of the Terms for Carriage and Clause 22(a) of the House Bill of Lading (whichever is appropriate to the relevant carriage) in order to recover these costs.” But a doubling, and sometimes trebling, of shipping costs in the short term is of little significance to Australian builders and suppliers who watched costs soar from $4500 for a 40ft container (FEU) to around $15,000 during the height of the pandemic . Regardless, Xeneta chief analyst Peter Sand said he expects ocean freight shipping rates to increase again next month. “Carriers are trying to readjust services to make up for the additional sailing time around the Cape of Good Hope,” he said. ▲ The Port of Melbourne: About 13 per cent of all full containers arriving each year are from Europe. “For example, they are cutting journeys short, missing port calls and increasing sailing speed. “However, despite this, the early data from Xeneta suggests rates will continue to rise as we head into February.” McSweeney says it is not just the cost of shipping, but the delays that come with it. “We spent years and years refining the whole process to make sure that materials turned up when you needed them,” he says. “Anything that actually disrupts that process can be costly.” And then there is oil. Crude oil is the world’s most traded commodity, and five of the top 10 oil-producing countries are in the Middle East. The price of Brent Crude—one of the global benchmarks used to set the price—on Friday rose for a second week in a row and settled at its highest rate in nearly two months. ▲ Rates for shipping containers between Europe and Asia-Pacific have risen by 243 per cent since the Red Sea crisis began. Also on Friday, an oil tanker with links to the UK was on fire for several hours in the Gulf of Aden after being hit by a missile fired by the Houthis. The Iran-backed movement said it targeted the Marlin Luanda in response to “American-British aggression". “The oil thing will be interesting,” McSweeney says. “If there’s going to be a further escalation, that really is where we will start seeing issues in relation to oil. “A lot of commodities are tied to the oil price and usually if you get a spike in oil, it has flow-on on effect to a number of the other commodities as well.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. 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[+] Red Sea Conflict Raises Supply Chain Questions

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