House panel hearing: Supply-chain reps describe economic impact of Houthi attacks on commercial shipping
2/1/2024
By Julie Sneider, Senior Editor
The U.S. House Transportation and Infrastructure Committee Coast Guard and Maritime Transportation Subcommittee held a hearing Jan. 30 on the terrorist threats against the commercial shipping industry in the Red Sea and what Congress can and/or should do about it.
The Red Sea is located on a pivotal route for container shipping and international commerce, linking the Indian Ocean with the Mediterranean Sea via the Suez Canal. About 15% of global shipping volumes travel along this route, according to logistics company WeFreight. Since November 2023, an increasing number of civilian and military vessels have been attacked by the Houthis, an Iranian-backed rebel group based in Yemen, in an effort to disrupt global commerce by ships crossing the Red Sea.
The Houthis say they want to disrupt shipping links with Israel to force Israel to end its military campaign in Gaza, The New York Times reported Jan. 16. However, many of the ships that the Houthis have been attacking have no connection to Israel. In response, the United States and United Kingdom have carried out strategic strikes on Houthi bases in Yemen. And some major shipping companies have stopped using the Red Sea and are rerouting ships to a much longer route around the horn of Africa, prompting days or weeks of delays in shipments.
In December 2023, the United States established Operation Prosperity Guardian, a multinational security initiative to support maritime commerce moving through the Red Sea, Subcommittee Chairman Daniel Webster (R-Fla.) noted.
“In response to these threats, we have seen carriers reroute ships around Africa and insurance costs skyrocket, leading to increased container rates and longer transit times for goods to arrive at their destinations,” Webster said at the start of the hearing. “At the same time these disruptions are occurring in the Red Sea, the Panama Canal is also facing bottlenecks as low water levels are forcing canal authorities to reduce transits by half — compounding uncertainty for ocean carriers and shippers.”
Webster also voiced concern about the impact on the global economy when the supply chain sustains a major disruption, such as the pandemic, and “we must not let it happen again,” he said.
"We have seen carriers reroute ships around Africa and insurance costs skyrocket, leading to increased container rates and longer transit times for goods to arrive at their destinations.” — U.S. Rep. Daniel Webster (R-Fla) webster.house.govWitnesses who testified were Charles “Bud” Darr, executive vice president of maritime policy and government affairs at MSC Group, the global container shipping company; Ian Ralby, CEO of I.R. Consilium; Jonathan Gold, VP of supply chain and custom policy at the National Retail Federation; and David Heindel, president of the Seafarers International Union.
Darr said MSC is diverting services that normally would travel through the Red Sea and Suez Canal to around the Cape of Good Hope until the company is confident the ongoing security situation is safe enough to return.
“The Suez Canal is a vital trade route for liner shipping and supports 10% to 15% of world trade and 30% of global shipping volumes. Thus, the decision to avoid the Red Sea and Suez Canal is a significant one,” Darr said.
He also noted that the Panama Canal is dealing with severe drought and has had to cut its daily ship crossings and reduced the maximum draft of vessels.
“Prior to the Red Sea attacks, many shipping companies diverting from the Panama Canal to avoid delays or reduced cargo loads were relying on the Suez Canal and Red Sea as an alternative route for their vessels,” he said. “The Red Sea security situation has severely limited this option, which puts further pressure on liner shipping companies.”
Darr said MSC officials hope Congress’s investment in U.S. port and landside infrastructure “will at some point provide additional capacity and resiliency to handle similar future supply and demand surges caused by geopolitical and other unanticipated major events.”
Gold said NRF’s members have reported the following supply chain challenges since the Houthi attacks began in the Red Sea: increases shipping timelines and costs; peak season and transit diversion surcharges; and material and component shortages that impact vendors and manufacturers.
“The decision to avoid the Red Sea and Suez Canal is a significant one.” — Bud Darr, MSC Group MSC Cargo/twitter.comRetailers are working with their supply-chain partners to implement strategies to reduce their risk and ensure products arrive on time. They’re already making decisions now for the 2024 back-to-school and holiday shipments, Gold said.
Many NRF members also have shifted or are considering shifting their supply chains back to West Coast ports after shifting away from them during last year’s labor negotiations, he said. That shift back could cause congestion at the West Coast ports if they’re not planning for a surge in cargo, Gold said.
“We need to make sure our ports, terminals, railroads, drayage providers and warehouses are ready for the increased volumes,” he said. “We are already hearing that rail dwell times are starting to tick up. Rail car imbalances and increased demand could result in more congestion and increases in dwell.”
While the subcommittee’s hearing was focused on the impact of the Houthi attacks and disruptions of shipping in the Red Sea, Gold said other challenges will further complicate the supply chain, creating additional constraints in the market and global economy. Among them are concerns over potential labor disruptions at East Coast and Gulf Coast ports as labor negotiations occur between the International Longshoremen’s Association and the United States Maritime Alliance. The current contract is set to expire at the end of September, which is the peak shipping season for holiday merchandise.
“Again, retailers are making their shipping decisions now and many are looking to shift to the West Coast to avoid any potential issues,” Gold added.
Ian Ralby, founder and CEO of I.R. Consilium and an expert in maritime law and security, explained the complexities involved in stopping the Houthi movement’s sustained assaults on global commerce. Although their initial attacks were said to show support for Gaza, they’ve since moved to bolster their own ambitions, Ralby told the committee.
“If the war between Israel and Hamas ended today, it is highly unlikely that the Houthis would cease their attacks on vessels transiting the Red Sea,” said Ralby. “After years of fighting in Yemen and claiming to be at war with the United States and the United Kingdom, the Houthis are thrilled to have finally achieved widespread visibility, and global relevance.”
The recent strikes by the United States and United Kingdom helped legitimize the Houthis’ domestic cause and helped recruit new members, he said.
“Unless the United States changes it approach, global shipping will remain impeded, the region will descend further into intractable conflict and the U.S. economy will suffer,” Ralby added.
Chairman Webster asked Darr what lessons were learned from the global supply chain crisis during the pandemic and whether those lessons could help address what’s happening now in the Red Sea as well as prevent future situations.
“We need to make sure our ports, terminals, railroads, drayage providers and warehouses are ready for the increased volumes.” — Jonathan Gold, National Retail Federation nrf.comThe fundamental problems in the pandemic-era supply-chain crisis in the United States can be traced back to the shore side component of the supply chain, Darr said.
“I think addressing both the infrastructure and operational practices [at shore side] can help insulate us for future crises,” he said. “That’s the part that failed us as consumers and companies trying to serve the economy.”
The pandemic-era supply-chain crisis also taught supply chain-related industries to expect the unexpected, Darr added.
“It taught us to be as nimble as possible, and it forced us to maintain additional capacity to be able to respond” to the unexpected, he said. “If we did not have that additional capacity, given the current market conditions we would be in a much more difficult situation. Because we kept that additional capacity available ... we’ve been able to deploy it and the goods are moving.”
U.S. Rep. Hillary Scholten (D-Mich.) asked Gold for an estimated cost to the economy if the Red Sea route is no longer a viable option for shipping cargo. Due to the many variables at play, there is no estimate yet, Gold said.
“The supply chain will adjust and adapt,” Gold said. “We’re seeing some of those [increased] costs being passed along now, especially to small and medium sized enterprises who don’t have the ability to negotiate and push those costs off. But as new contract negotiations come up, there will be an impact. Also, there could be an impact from congestion at the ports. Preparing for what’s to come is where we need to be focused now.”
