Inflation is back on the menu, guys!

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With 158 vessels carrying approximately $105 billion in ocean freight being diverted away from the Red Sea amid the risk of continuing Houthis’ attacks, cargo prices are soaring.

Just when Covid supply chain inflation seemed vanquished, ocean freight rates are increasing 40 percent on some trade routes and container prices reaching $10,000, with some logistics executives concerned about “opportunistic” price gouging.

IKEA, one of the companies to say there will be delays in products reaching stores, tells CNBC it is reviewing options to move freight, while Danone is disputing reports that it is experiencing short-term supply chain delays.

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With the Red Sea diversions by shipping companies including Maersk continuing amid the risk of attacks by the Houthis, global logistics managers are faced with a two-front storm of rising ocean and air freight prices and stranded cargo. Both are threats to the global supply chain after three tumultuous years of inflationary pressures and delays from Covid disruptions which recently seemed to finally have been vanquished.

The ceiling in ocean freight prices shot up in a matter of hours on Thursday as a result of more vessels diverting from the Red Sea. CNBC has learned that logistics managers were quoted this morning an ocean freight rate of $10,000 per 40-foot container from Shanghai to the U.K. Last week, rates were $1,900 for a 20-foot container, to $2,400 for a 40-foot container. Truck rates in the Middle East now being quoted are more than double.

Alan Baer, CEO of OL USA tells CNBC while pricing is undergoing rapid adjustments as ocean carriers work to recover the added costs of diverting their vessels, these massive jumps in rates need to be clarified as the shipping community of importers and exporters, along with government regulators seek to better understand the overall drivers of these large increases.

“During Covid, we had a slower build-up in freight prices due to the impact the pandemic had on the global supply chain,” Baer said. “What we are experiencing here is a light switch event where vessels are being redirected in real time. But, that said, in certain trade lanes you are seeing freight rates going up between 100 to 300 percent. This does not appear to be totally driven by changes in supply and demand.”

As of Thursday morning, 158 vessels are currently re-routing away from the Rea Sea carrying over 2.1 million cargo containers, Kuehne + Nagel tells CNBC. The value of this cargo based on MDS Transmodal estimates of $50,000 per container is $105 billion.

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U.S. shippers have several ocean route options, but European shippers do not. Europe heavily depends on the Suez. The re-routing for Europe has a longer transit time than the United States and as a result, European shippers are looking to the air to move their products.

Judah Levine, Freightos head of research, said while the Freightos
Air Index daily rates for China to N. Europe shipments had been declining since late November, the push to air this week has fueled air freight prices.

“This week they’ve increased 13% from $3.95/kg to $4.45/kg since ocean carriers made widespread diversion announcements, possibly reflecting an increase in air cargo demand from ocean to air shifts,” said Levine.

Brian Bourke, chief growth officer of SEKO Logistics, says the severity of a Red Sea impact on the global supply chain all depends on the length of time of the re-routing.

“Every day this continues it escalates, starting with Europe and then the U.S. East Coast, you will start to see more conversion from ocean freight to air,” said Bourke. “Starting with higher value goods like consumer electronics, high-value consumer product goods and fashion apparel. This is due to the longer lead times that will increase inventory carrying costs and working capital which justifies the higher cost to move goods much faster.”

In an advisory to clients, shipping company HMM wrote, “Given the intricate nature of the current circumstances, HMM faces the decision of implementing a waiting period of undetermined duration or exploring alternative routes with additional costs.”

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A global inflation warning

The sudden jump in ocean freight and its inflationary impact also depends on the duration of the vessel re-routing and the length of time shippers pay the higher freight costs. Logistics CEOs tell CNBC once the timeline hits the one-month mark, inflationary pressures will be felt and seen in the supply chain and eventually at the consumer level.

CNBC previously reported that MSC, the world’s largest ocean carrier, was the first ocean carrier to increase rates from India by 30-40%.

“To many, the jump in rates from India to the USEC [U.S. East Coast]] from approximately $2,000 per 40-foot container to $7,000 per 40-foot container in just 30 days appears egregious,” Baer said. “Is this rate increase really the level required to recover costs, or are they simply taking advantage of an unfortunate situation for the entire global community?”

Baer said shippers need stable pricing and vibrant economies to generate demand. MSC did not immediately respond to a request from CNBC for a comment on its rate increases. Traditionally, ocean carriers do not expand upon information released in their client advisories.

Logistics CEOs who have spoken with CNBC say they would like more transparency on cost increases since the ocean carriers are no longer paying the $500,000-$600,000 toll to pass through the Suez Canal but are increasing rates.

Retailers in the American Apparel and Footwear Association are closely watching the situation in the Red Sea and they are urging the full and immediate deployment of Operation Prosperity Guardian to ensure the protection of the vital waterway.

“With 98% of apparel imported, it is absolutely essential to have safe and affordable shipping,” said Steve Lamar, CEO of AAFA. “Members are already being forced to divert goods and are encountering surcharges.”

He alluded to the 2021 Suez Canal obstruction as an example of how any disruption in the trade gateway has immediate implications for the delivery and cost of goods.

Federal Maritime Commission Chairman Daniel Maffei told CNBC earlier this week that it is monitoring the situation and are aware of shipper concerns.

Jon Gold, vice president of supply chain and customs policy for the National Retail Federation, said its members continue to work with ocean carrier partners to address the ongoing situation in the Red Sea and Suez Canal.

“These disruptions are adding two or more weeks to transit times for retailers, resulting in increased rates,” said Gold. “As supply chains have begun to normalize again, the added pressure from these additional costs and delays could have a significant impact.”

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