Red Sea shipping disruptions would be much worse if not for these factors, logistics expert says

By James Rogers

The Lunar New Year holiday and the lingering effects of the COVID-19 pandemic have limited the impact on global supply chains caused by Houthi attacks

The disruptions caused by Houthi attacks on cargo ships in the Red Sea would be much worse were it not for the Lunar New Year holiday and the lingering effects of the pandemic, according to logistics expert Pawan Joshi.

Joshi, the executive vice president of products and strategy at supply-chain platform E2open, said that pandemic-era macroeconomic softness means that shipping capacity is available. "We have got enough capacity," he told MarketWatch. "Unless there's a dramatic change in the capacity available or the demand profile changes, it's going to continue to operate in this steady-state mode."

If shipping capacity had been nearer to peak levels, the Red Sea attacks and the current drought conditions affecting the Panama Canal could have had a "massive impact," Joshi said.

Related: Red Sea container traffic is down almost 30% amid Houthi attacks, says IMF, as experts weigh wider impact

A more recent factor that has also eased the effects of the disruption to shipping in the Red Sea is the Lunar New Year holiday, which began on Feb. 10. "A lot of the production capacity goes offline in Asia around the Lunar New Year," Joshi said. "This disruption happened at a time when production in China and Asia is pretty much done for the season and [cargo is] already prepositioned" around the world. This, he added, has lessened the supply-chain impact on finished goods, raw materials and components.

But the Red Sea attacks, which were launched by Iranian-backed Houthi rebels in October, have resulted in longer transit times for cargo, as ships must now use alternate routes. In recent testimony on Capitol Hill, the National Retail Federation said that rerouting cargo around South Africa's Cape of Good Hope adds 10 to 14 days to its members' supply chains.

Shipping rates to send containers from China to the U.S. have also increased dramatically in the wake of the attacks, according to online container-trading and -leasing platform Container xChange, which says that February leasing rates are up almost 300% year over year. "However, we do expect that these rates will cool off post-Chinese New Year," said Christian Roeloffs, the company's chief executive. "A lot depends on the [post-holiday] demand."

Related: Red Sea disruption forces retailers to rethink back-to-school and holiday shipments

The Suez Canal, which connects the Red Sea to the Mediterranean, is a critical artery for global trade. In the first half of 2023, trade going through the Suez Canal represented about 12% of global trade, including 30% of container traffic, 10% to 15% of global seaborne cargo and 8% of global liquefied-natural-gas shipments, according to the International Monetary Fund.

Last month, the National Retail Federation warned that the disruption caused by the Houthi attacks was forcing U.S. retailers to rethink how they handle back-to-school and holiday shipments.

In January, British clothing seller Next PLC warned that the attacks could disrupt the company's supply chains and delay U.K. deliveries by up to two and a half weeks, and Tesla Inc. (TSLA) temporarily halted production at its factory in Germany due to supply-chain disruptions.

Related: Red Sea and Panama Canal disruptions may snarl supply chains, but these two toy makers appear well-positioned

Analysts have warned that several retail stocks could be exposed to the fallout from the Red Sea attacks, with Wells Fargo seeing Dollar Tree Inc. (DLTR) as most at risk from the disruption.

Skechers USA Inc. (SKX) was asked about the Red Sea issues during the conference call to discuss the company's recent fourth-quarter results. "As far as Europe is concerned, we're no different than anybody else," said David Weinberg, the company's chief operating officer.

"I think the good news for us is we had a higher demand going in and that is showing up in the first quarter," he said. "We brought a lot of goods in early and feel we're in a pretty good situation, depending on how long it goes."

Related: Skechers slides on Q4 sales miss, as retailers 'conservatively manage' inventory levels

Weinberg also noted that the U.S. West Coast is getting "a little backed up" because of the drought affecting the Panama Canal, but he said the problems are not as extensive as they could be. "Right now we seem to be in pretty good shape," he said. "We had taken our deliveries in early, knowing that we were going to ship very heavily in the end of December and through this whole month of January."

-James Rogers

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02-14-24 1539ET

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