Red Sea attacks driving up transportation costs, GEP report finds

Attacks on commercial ships in the Red Sea by Iran-backed Houthi rebels have driven up transportation costs to a 15-month high, according to the January edition of the GEP Global Supply Chain Volatility Index.

Missile and drone attacks on ships passing through the Bab-el-Mandeb strait have led numerous shipping firms to opt for the lengthier route around the Cape of Good Hope – driving up costs and shipping times. Though transport costs in January rose to a 15-month high, they remained well below the heights reached in 2021-2022 during the post-pandemic supply crunch.

There was also a slight uptick in safety stockpiling, reaching a seven-month high as some buyers expressed supply or price concerns.

January was nonetheless the ninth successive month of excess capacity at global suppliers, rising to a -0.12 index score from -0.44 in December. The increase, however, may suggest underlying trading conditions are improving as recession and inflation fears ease.

GEP’s monthly survey tracks 27,000 businesses globally to measure demand conditions, shortages, transportation costs, inventories, and backlogs. An index value above 0 indicates supply chains are being stressed, while a value below 0 means supply chain capacity is being underutilized.

Asia drove the index score rise with a jump to 0.14 from -0.42 in December as demand improved in key exporting nations. Factory purchasing activity in China, South Korea, and India rebounded to their highest levels in nearly a year – suggesting manufacturers are gearing up for growth.

Suppliers in North America and Europe also saw excess capacity drop slightly, with North America’s index score rising to -0.33 from -0.39 and Europe’s score rising to -0.63 from -0.92.

“The world’s supply chains got busier in January, and activity at our global manufacturing clients is ticking up,” said Daryl Watkins, senior director, consulting, GEP. “With input demand trending higher, led by Asia, signaling a return to positive growth in the coming months, it is imperative business keeps tamping down suppliers’ price increases so inflation continues to trend down,” said Watkins, summarizing the implications.”

Global purchasing of raw materials, commodities, and components remained subdued in January, while reports of item shortages remained among the lowest levels in four years. Labor availability also remained unproblematic for suppliers.