Red Sea attacks could raise prices for U.S. consumers

Attacks on Red Sea shipping might raise prices for consumers because cargo carriers take longer routes to avoid dangerous waters for now.

Iran-backed Houthi rebels in Yemen first struck cargo ships with drones and missiles this month in what they claim is retaliation for Israel’s actions in the Gaza war.

The disruptions caused shipping giants Maersk, CMA CGM and COSCO to reroute shipments around the Cape of Good Hope in South Africa, maneuvers that are increasingly costly to shippers and consumers.

As of Tuesday, shipping carriers expect most services to avoid the Red Sea through China’s Lunar New Year festival, said Ryan Petersen, CEO of Flexport, a logistics technology company.

The two weeks leading up to the celebrations is a peak period for shippers, who rush to deliver goods before the holiday, which starts Feb. 10.

Experts say the costs of rerouting vessels around South Africa or through the Panama Canal will increase prices for consumer goods shipped from Asia to the U.S. East Coast.

“It’s about an 8% longer journey, which is going to drive prices up quite a bit for ocean freight – that’s a material impact on prices for the goods themselves,” Petersen said.

The rising costs will affect the price of “most of the stuff that you see in all the stores,” other than food, raw materials, and energy, he added.

Tucked between two continents and bordering 10 countries – six in Africa and four in the Middle East – around 12% of all global trade passes through the Red Sea and Suez Canal, according to the U.S. Naval Institute.

It’s also an especially important passageway for fuel tankers.

Wholesalers and retailers will still bear some of the increased shipping costs, especially on items with tight profit margins and competitive pricing, as well as goods that will no longer be in season, according to George Kochanowski and Richard Danderline, CEO and chief financial officer of Staxxon, a company that makes shipping containers.

“You can’t sell Valentine’s Day cards on St. Patrick’s Day,” Kochanowski said.

While the most immediate effect of the conflict is on the shippers that have to reroute from the Red Sea, the added traffic to other passages “will ultimately metastasize to the entire world,” said Danderline.

Shippers expect the congestion in the Panama Canal, for instance, to grow worse the longer the conflict continues.

It also precedes an important season for industry between March and May, when shipping companies tend to sign annual contracts.

To protect cargo ships in the Red Sea region, U.S. Defense Secretary Lloyd Austin last week announced the launch of Operation Prosperity Guardian, a maritime security force with units from 20 countries.

The industry has welcomed the security of the coalition but continues to cautiously reroute its shipments, satellite data shows.

As of Tuesday, 290 vessels had either diverted or planned to divert from the conflict zone, according to data compiled by Flexport and shared with The Washington Post.

But knowing the exact number of vessels that brave the journey through the Red Sea is difficult to quantify, as most ships are turning off their location devices to avoid being detected by the Houthis, Flexport’s Petersen said.

Global shipping giant Maersk said on Dec. 24 it would resume some shipments through the Red Sea after Operation Prosperity Guardian was deployed, which it called “welcome news for the entire industry and indeed the functionality of global trade.”

But “the overall risk in the area is not eliminated at this stage,” a Maersk spokesperson told The Washington Post.

“Maersk will not hesitate to reevaluate the situation and once again initiate diversion plans if we deem it necessary for the safety of our seafarers.”

Despite the U.S.-led security effort, the attacks on cargo ships continue.

On Tuesday, the Houthis announced it struck the commercial ship MSC United VIII in its latest attack. MSC later reported no injuries to its crew.

A Pentagon spokesperson put no timetable on how long the attacks are expected to last but said the U.S. reserved the right to defend itself and its interests.

The Red Sea attacks are the latest disruption for a global supply chain that has seen snags and inflationary pressures dating to the early days of the pandemic, when freight costs hit record highs caused by demand for goods manufactured in Asia outstripping supply.

As global lockdowns forced everyone into their homes, consumers fed the economy by shopping online.

The sudden demand for goods caused operational costs to soar – most notably, freight container shipping rates from Asia.

But freight rates dropped in 2022 as consumer demand waned.

Americans, battling record-high inflation, cut back on discretionary spending on items such as technology and apparel to afford essentials like food and gas, leaving retailers with a glut of inventory.

A larger supply chain disaster was avoided in June, when port operators inked a new deal with the International Longshore Workers Union for a contract that included a significant pay hike – 32% increases in wages over six years.

If the Red Sea attacks persist into September, it will coincide with the expiration of the labor contract between East Coast port operators and the International Longshore Association, which said in November it won’t extend the contract and is prepared to strike.