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FMM urges manufacturers to proactively plan operations in the wake of Red Sea shipping crisis

By January 16, 2024January 18th, 2024No Comments

KUALA LUMPUR: The current unrest in the Red Sea is expected to cause delays for ships returning to Asian countries, including Malaysia, with freight rates tripling in 2024 from the previous year.

The Red Sea crisis has severely impacted businesses due to increased freight costs, longer lead times, and a lack of available containers for importers and exporters.

Four of the world’s five largest shipping companies – Maersk, Hapag-Lloyd, CMA CGM Group, and Evergreen – along with oil giants like BP, have suspended shipping through the Red Sea, sending shipping costs skyrocketing and oil prices plunging.

 According to Global media reports, oil prices increased 4.3 per cent to surpass US$80 per barrel, reviving concerns about inflation and raising fears of a wider regional conflict after the United States and the United Kingdom launched a joint military response on Friday against targets in the Houthi movement.

Tan Sri Soh Thian Lai, president of the Federation of Malaysian Manufacturers (FMM), urged the government to keep a close watch on the situation to ensure that the impact does not escalate and further burden businesses and the economy.

 “As we progress into 2024, the shipping disruption stemming from the Red Sea crisis may be compounded by other threats such as extreme weather events or shifting geopolitical tensions, which will further damage already distressed global supply chains.

“As supply chain turbulence is likely to persist, Malaysian manufacturers will continually need to be vigilant and proactively plan their operations to withstand additional shocks,” he said.

 Soh said any announcement regarding a new increase in freight rates or the introduction of surcharges should be made transparently and negotiated directly with shippers, allowing exporters to make plans and engage in negotiations with their importers.

 According to Soh, FMM is extremely worried about the growing security situation that is developing in the Red Sea area.

 He said the circumstances in the Red Sea have compelled a number of the biggest shipping companies in the world to reroute their vessels to a considerably longer route that goes around the southern tip of Africa.

The extra time required to circumnavigate Africa adds one to two weeks to the journey, which he said will increase the cost of exporting goods to North Africa, the Middle East and Europe because freight rates are predicted to triple from the previous year.

 It will also delay ships returning to Asia, he added.

 Soh said Malaysian exporters should prepare for the possibility that the Middle East crisis will cause empty container supplies to become scarce once more.

 In order to better meet customer demands, he urged Malaysian shippers, both importers and exporters, to improve their business strategies to protect their supply chains and shorten delays.

 He recommended shippers accept reservations for exports in advance in order to lessen the effects of the worsening situation in the Red Sea.

 “In light of fluctuating freight rates and uncertain transit times, shippers need to prepare container bookings and shipping schedules, preferably one month in advance, for exports to affected markets.

 “For goods that are not time-sensitive, it is advisable to wait until the first few weeks of February 2024 during the Chinese New Year holiday, as freight costs are expected to decrease during this period,” he said.

 To help shippers plan their business operations, FMM urges shipping companies to honor the pre-booked freight rates provided to Malaysian shippers without modification.

Singapore Institute of International Affairs senior fellow Dr Oh Ei Sun said Malaysia, already facing challenges with low export rates due to subdued global demand, now faces additional obstacles for a healthy export rebound.

On the import side, Malaysia heavily relies on the Red Sea route for foodstuff and daily-use goods, potentially leading to higher prices and increased burden on consumers, he added.

On the supply chains, Nusantara Academy for Strategic Research senior fellow Dr Azmi Hassan said it will not be affected that much except that the cost of the product will be much more expensive especially on the imported goods.

“Our exported goods to Europe will be expensive in this case,” Oh remarked.

He said supply chains that could be disrupted included those for the just-in-time electronics stuff. These items might face challenges due to these increased shipping rates.

Container ships are the main means of worldwide transport for finished and semi-finished goods.

Centre for Market Education logistics analyst Nick Chong said the world container index increased from an average rate of US$1340 to US$2600 in a short period of time.

While this increase is considered acceptable compared to the Covid-19 period, he warns about potential long-term impacts on the cost of general goods if such high costs persist.

“I believe this rate is still at an acceptable level if we compare it to during covid time. The short-term impact is not that high. However, if the cost remains high for a long time, it will have an impact on the cost for our general goods,” he told Business Times.

Malaysian manufacturing businesses are addressing potential disruptions by tailoring their shipping methods to the nature of their goods.

Chong said for smaller parcels, companies are opting for air freight or courier services to maintain consistent costs despite Red Sea disruptions.

In contrast, for bulkier items, businesses are exploring alternatives such as smaller shipments or, if necessary, passing on additional charges to customers, he added.

Malaysian Institute of Economic Research head of research economist Dr Shankaran Nambiar said the aftermath of the Red Sea crisis is currently a mixed bag of outcomes, and only time will reveal the full impact.

He said at present, the demand for goods traveling from China to the US West Coast is showing a decline, and prices are holding steady, for now at least.

“However, there’s a looming uncertainty, and if the situation does not improve, we could witness a shift. Malaysia’s trade dynamics currently involve strong connections with Singapore, where goods are often re-exported, as well as with China and intra-Asean trade. Yet, as global pressures increase, these patterns may evolve,” said Nambiar.

Various responses are likely to emerge as businesses adapt to the changing circumstances. Exporters might opt for air transport or choose longer routes to keep their supply chains intact.

The price of oil is anticipated to rise, contributing to an environment of heightened uncertainty, this, in turn, could fuel inflation, lead to increased interest rates, put constraints on global trade, and dampen overall global demand, said Nambiar.

Even if the direct effects are limited, in that Malaysian traders do not need to use the Red Sea pathway extensively, the overall scenario will affect Malaysian businesses, he added.

“The logistics industry will attempt to adopt alternative routes or forms of transportation but costs will go up even for Malaysian entities,” said Nambiar.

Malaysia University of Science and Technology economist Dr Geoffrey Williams said the recent rise in container shipping rates has impacted Malaysia’s import and export costs, much like it has affected everyone else.

“However, in relative terms, it won’t specifically harm Malaysia more than other countries. This means that Malaysia’s competitiveness in international trade won’t be significantly compromised due to the increase in shipping expenses,” added Williams.

This article first appeared in New Straits Times, Business Times on January 16, 2024