The extended Red Sea crisis poses a significant threat to the apparel manufacturers in Bangladesh, with rising freight surcharges, extended lead times, and concerns about order redirection and future price adjustments.
Moreover, industry insiders warn that the crisis could trigger another container shortage, given the ongoing global disruptions in the supply chain and the disorder in global container and logistics schedules.
According to BGMEA President Faruque Hassan, the Red Sea conflict has already led to an increase in freight costs and is expected to impact overall trade. Buyers, who bear the brunt of these rising costs during exports, may find themselves facing higher product prices as a result.
Bangladesh heavily relies on the Red Sea-Suez Canal route, the fastest and most efficient, to ship nearly 70% of its ready-made garment (RMG) items to Europe and the US. The severity of the crisis amplifies the risks for the country's apparel sector, introducing challenges that extend beyond immediate concerns such as increased costs and delayed timelines.
Nearly all commercial shipping lines have been rerouted away from the Suez Canal towards the longer route around the Cape of Good Hope since Yemen’s Iranian-backed Houthis stepped up attacks on vessels transiting the Gulf of Aden and southern Red Sea since late November.
So far, Houthis have launched at least 25 attacks on merchant vessels passing through the southern Red Sea and Gulf of Aden
Why is the Red Sea-Suez Canal route important?
The Suez Canal handles about 12% of global trade and 30% of global container traffic. Rerouting shipments around the Cape of Good Hope add about 3,000-3,500 nautical miles to journeys connecting Europe with Asia, and about 11-13 days to the duration of trips, when trips normally take 27-30 days from major Asian transshipment ports like Singapore, Colombo or Port Klang.
About 19,000 ships, carrying around $1 trillion worth of goods, navigate the Suez Canal every year but the rate has dropped by at least 64% due to attacks.
Hike in freight costs
Along with the disruption of the global supply networks, Bangladesh is particularly hard struck as the economy of the country is solely dependent on the apparel sector, which generated $47 billion in revenue last year out of around $55 billion in export earnings.
Major shipping companies like Maersk, MSC, Hapag-Lloyd, CMA CGM, Zim and One are largely or completely avoiding the Red Sea because of the threat from the Houthis. As a result, they have imposed surcharges.
According to media reports, the fare for moving goods from China to Northern Europe rose from $1,500 to $4,000 per 40-foot container.
Speaking to Dhaka Tribune, Khairul Alam Sujan, vice-president of Bangladesh Freight Forwarders Association (BAFFA), said that already the cost of shipping containers from Bangladesh to Europe and America has increased by 40% to 50% due to the surcharge.
He also said that the charges may shoot up by another 20%-25% if the crisis prolongs.
BGMEA Director Mohiuddin Rubel told Dhaka Tribune that the Red Sea crisis is becoming another Covid-19-like situation for the industry as they have to pay an additional 40%-50% in freight costs.
The surges in freight costs bring a catastrophic blow to the Bangladeshi RMG makers as they are already operating on thin margins following a 56% pay hike in January.
Industry insiders said that they will have to choose expensive air shipments if suppliers fail to deliver products within the agreed time, and the cost will be too high.
For instance, it costs less than 30 US cents to move one kg of goods from Chittagong to European destinations through sea routes whereas the carrying cost for the same quantity is $3.50 if air freight service is used, they said.
Will the crisis impact work orders?
Shipping corporations are rerouting their ships around Africa and the Cape of Good Hope to avoid the Red Sea, which takes 11-13 more days.
If the crisis is not solved immediately, there is a fear of losing work orders for the country’s apparel manufacturers.
Shovon Islam, managing director of Sparrow Group, spoke to Dhaka Tribune regarding the matter, and said that buyers haven’t canceled any consignments which were ordered earlier.
“They politely requested us to ship the product a week in advance, saying they will bear the additional cost,” he added.
But the matter of concern is on the future orders. If the crisis is prolonged, the buyers may impose additional costs on the manufacturers, he further said.
“We fear some of the orders may be diverted to competitors as they have capacity to deliver the orders faster, which may affect us in the long run,” he added.
BGMEA Director Mohiuddin Rubel also said that in the future, they may lose work orders if the crisis continues.
Zahid Hussain, former chief economist of World Bank Dhaka Office, told Dhaka Tribune that the impact of the Red Sea crisis will be more visible in the long run.
“If such a situation continues, it will have a big impact on both imports and exports in Bangladesh. Buyers will turn to near sources if shipping costs rise which can impact our export. However, in the current state of our economy, it will be relatively difficult to deal with such a crisis,” he added.
Bangladesh is the second-largest exporter of RMG items but it is unable to fulfill orders swiftly because its main port, Chittagong, is too shallow.
Usually, Bangladeshi exporters use feeder vessels to transport small batches of containers from Chittagong to mother vessels at transshipment ports like Singapore, Colombo, or Klang ports.
This process takes more lead time for Bangladeshi exporters than their competitors, industry insiders said.
Another container crisis approaching?
Industry insiders fear the Red Sea crisis may create another container shortage across the globe.
Khairul Alam Sujan said that there is a shortage of 40-foot containers in Bangladesh as a result of the 11-day maritime route delay brought on by the ship attack in the Red Sea.
“A container slot crisis on the mother vessels has also emerged at the same time, along with disruption in the schedule,” he added, mentioning that 40-foot containers hold 75% of Bangladesh’s exports, especially the RMG exports.
A scarcity of 40-foot containers already exists in multiple depots, so a fresh container crisis may hit Bangladesh, as the country saw post Covid-19.
A weaker position in price bargaining?
As Bangladesh’s apparel sector is already lagging behind to meet lead time considering their competitors, the Red Sea crisis may further impact them.
Shovon Islam said, as the freight cost has surged due to trips via Cape of Good Hope, it may have a long term effect on the country’s RMG sector, especially price negotiation.
“After raising the minimum wage, we were in good shape to negotiate for a fair price. However, if the situation drags on, and the buyers bear the additional cost, we may lose our bargaining power,” he added.
The Red Sea crisis hit the country at the time when the RMG sector was struggling as the exports to its major destinations witnessed continuous negative growth for few consecutive months and weathering domestic crises like power and energy shortage, political upheaval etc.
In response to the attacks, the UN has unequivocally stated that no cause or grievance justifies Houthi attacks against freedom of navigation in the Red Sea.
On the other hand, the US has declared the formation of a coalition, named Operation Prosperity Guardian (OPG), comprising several countries to conduct patrols in the southern Red Sea.
Despite these measures, there remains uncertainty about when commercial shipping groups will regain confidence and allow their vessels to traverse the Bab el-Mandeb strait again. The fluidity of the situation raises concerns about the prolonged impact of the Red Sea crisis on maritime activities and global trade.