According to the Q3 global freight transportation and logistics trends update from UPS, pressure on the global ocean supply chain from eight months of Red Sea diversions is reaching a tipping point. The report notes that disruption to service patterns has caused port and terminal productivity to decline as well as causing berthing delays, congestion and equipment imbalances.
DHL’s August ocean freight market update estimates that 7.2 million TEU (20-foot equivalent unit) of freight is avoiding the Suez Canal, a figure that equates to around one-third of overall effective capacity.
During a recent Demica webinar, Jonathan Steenberg, Chief Economist for Coface UK & Ireland observed that not only does moving goods around the Cape of Good Hope rather than the Suez Canal add about ten days to a ‘perfect’ supply chain with the added cost of ten extra days of fuel, labour and docking – it also attracts additional insurance costs, with some insurers quoting premiums up to 70 times higher than before the Houthi started attacking ships last October.
“The thing about the global supply chain is that it is so finely calibrated that once you change one element, the entire thing starts collapsing a bit,” he says. “All the ships that go around the Cape of Good Hope have to go back and what we are now seeing is under capacity and over activity in European, African and even Asia ports such as Singapore, which is reporting over five days delays at the moment.”
This is feeding into higher freight costs because ships are getting stuck at different key points along the way, meaning firms cannot make accurate estimates of when their goods might arrive.
Steenberg also refers to a lot of leveraged debt suddenly having to work in a world where interest rates are higher.
“This is more significant for SMEs because they usually operate with variable debt to a far larger degree than large companies, who may have fixed their bonds or other debt products for a longer period,” he says. “Most small and medium-sized businesses are suffering from rollover risk at the same time as credit standards from banks have gotten tighter.”
These banks either expect a premium on top of the policy rate that has increased or are being more selective about credit limits. “In some cases they have completely cut credit limits,” adds Steenberg. “This is an extreme case, but we have heard of banks basically saying ‘this is a sector we don’t touch at the moment’.”
Maurice Benisty, Chief Commercial Officer at Demica refers to the prospect of higher-for-longer interest rates driving companies to access lower cost forms of capital.
“We are seeing growth pick up as a result of treasurers looking to make greater use of receivables discounting in particular, but they are also more sensitive to utilisation,” he says. “That is hitting take-up of payables finance programmes especially hard in jurisdictions where companies were using dollar-based funding, particularly in Asia. The dollar has strengthened significantly and they are reweighting themselves towards local currency borrowing.”
This has translated into companies that were using the auto sell trading option being much more careful in the way they use the product because of the underlying cost.
“We were talking to one treasurer who was looking at whether they wanted to move from a structure where they were selling down large quantities of receivables as part of a programme to one where they were able to be more selective, looking at different structures,” says Benisty.
