Supply chain disruptions in the Red Sea are driving up apparel sector shipping costs, causing alternative routes to be used and could result in longer-term shifts in sourcing as well as logistics, if the crisis continues.

Since October 2023, Yemen’s Houthis, a Zaidi Shia Islamist militant group that controls much of northern and western Yemen, have attacked dozens of cargo ships in the Red Sea in response to the Israeli invasion of and bombing of Gaza, following Hamas’ October terrorist attacks. This has caused insurance companies to stop insuring vessels on that route and forced major shipping lines to divert cargo around the Cape of Good Hope, adding some two to three weeks in transport times.

“The immediate impact is an increase in transportation costs, longer lead times, and higher inventories, but the medium to long term also needs to be taken into account, on the impact on brands’ sourcing,” said Navdeep Sodhi, a partner at the Zurich, Switzerland-based consultancy Gherzi Textil Organisation. “What’s clear is that most of the $100bn in textile and clothing exported to Europe passes through the Red Sea route.”

While other estimates say a lower proportion of trade is funnelled through the Red Sea – all agree that this is substantial: an estimated 40% of clothing exports to Europe used that route and accounted for 20% of clothes and shoes imported into the US, according to the American Apparel & Footwear Association (AAFA), for example. Between 12% to 15% of all global trade passed through the Suez Canal in 2023, while the disruption over the past two months has caused trade volumes through the Canal to drop by 42%, according to the United Nations Conference on Trade and Development (UNCTAD).

Red Sea attacks lead to surge in shipping costs 

Shipping costs have surged as a result. A 40-foot container going from Asia to northern Europe cost $1,500 in mid-December, rising to around $5,500 in January; while to the Mediterranean, the cost rose from $2,400 to $6,800, according to freight booking platform Freightos.

“We’re back to a similar situation as during the pandemic, although not as bad. The maritime crisis has once again exposed the fragility of global supply chains and imposed a cost burden when the industry had been recovering from supply side inflation and high retail inventory,” said Sodhi.

Mike Flanagan, CEO of consultancy Clothesource Ltd in the UK, said the apparel industry has become “relatively used to disruptions (in supply chains) over the last 30 years”, and over the past four years, “there’s been a crisis of shortages of ships or congestion in ports”. “In many respects, with [clothing] inventories being relatively high, the crisis has probably come at about the least bad time it could have chosen,” he said.

Flanagan said that of all the flows in the global garment trade, the most affected is from south and east Asia to Europe: “From anywhere to the US tends to go across the Pacific, and most finished garments tend to be consumed in more affluent countries. Less affluent economies don’t buy as much,” he said.

Moreover, given obvious geographical factors, the sourcing of raw materials within the Mediterranean region, and exports from key manufacturers such as Türkiye, Morocco, Tunisia and Egypt, “were sort of exempt” from the Red Sea crisis, added Flanagan.

However, Mohamed Kassem, chairman and CEO of World Trading Company, a textiles and apparel sourcing organisation in Egypt, and board member of the International Textile Manufacturers Federation (ITMF), said there had been some disruption in exports to the US due to fewer ships going through the Suez Canal, which had taken on cargo in Egypt before sailing through the Mediterranean to the US Atlantic seaboard. The US is Egypt’s largest export market, followed by Europe.

Sodhi said the crisis “should be a clarion call for renewed efforts towards diversification of sourcing, including an evaluation of reshoring and nearshoring,”

Red Sea crisis and apparel sourcing shifts 

Will the Red Sea crisis prompt more nearshoring, especially for European buyers, from Türkiye, Tunisia, Morocco and Egypt? Nearshoring was an oft-heard buzzword during and immediately after the pandemic, but has not happened as much as expected, said Flanagan. “My suspicion is nearshoring won’t see a rebirth, and exporters will find a way to use overland routes, or will use some form of airfreight,” he said.

A route that is ripe for use is China’s Belt and Road Initiative, which over the past decade has built and upgraded railway lines from east Asia to Europe.

“Although it takes more time, it is a possible solution to a problem that didn’t really exist before. Maybe the increased cost of sea freight will make train shipments more of a possibility,” said Flanagan.

For the US market, Sodhi expects more manufacturing to occur in central American countries because of the Red Sea crisis: “This avoid disruptions to the long routes from Asia,” he said, which have also been impacted by disruptions to shipping through the Panama Canal due to low water levels caused by drought. UNCTAD noted in January (2024) a “staggering 36% reduction in total transits over the past month compared to a year ago”.

The impetus to seek alternative routes and diversify sourcing may come if the crisis not only continues but also expands as tensions mount in the Middle East. The Washington Institute for Near East Policy has warned that this Houthi policy of aggressive maritime attacks is not new and will be tough to deter: “The threat to local maritime security has been growing over the past few years, and the Hamas-Israel war has magnified it. Previously, the Houthis targeted ships linked to countries involved in the Saudi-led coalition war in Yemen,” it noted in a risk assessment.

“The industry sees it as the kind of disruption that happens every few years. That might be the case. But equally, this could be the time where it gets incredibly messy,” should the Israel-Gaza conflict expand into a regional war: “There is a real possibility [the crisis] moves from being a nuisance to turning the whole area into a mess,” said Flanagan.

Last month (January 2023) a supply chain expert urged apparel retailers to stay vigilant and have contingency plans in place.

By Just Style