The escalating crisis in the Suez Canal weakens forest industry companies' competitiveness
The crisis in the Suez Canal and the Red Sea is causing difficulties in forest industry’s shipments and trade, an increase in maritime freight rates, and the introduction of additional charges. A prolonged crisis could result in a decline in the competitiveness of companies compared to their competitors.
Finnish foreign trade is significantly affected by the situation in the Suez Canal and the Red Sea, where attacks by Yemeni Houthi rebels have disrupted international maritime traffic. These attacks seriously violate the freedom and security of navigation on this important route in Suez Canal, which is important for the international trade. The crisis also impacts the forest sector, with over 20% of exports directed towards Southeast Asia, much of which passes through the Suez Canal.
The Finnish Forest Industries Federation surveyed its member companies regarding the impact of the Suez Canal and Red Sea crisis on international trade and trade policy in the short term, as the crisis continues, and in relation to competitors and competitor countries. The results are alarming.
The effects of the crisis are already being felt
The immediate impact of the Suez Canal crisis has manifested in difficulties for forest industry companies’ shipments and trade, increased maritime freight rates, and the imposition of additional charges. The increase in freight rates and additional charges could, for example, amount to up to 500 USD per container for lumber products shipped to China, which translates to approximately 10 € per cubic meter of lumber.
Freight rates have also risen for shipments to the eastern Mediterranean countries. Some insurance companies have ceased insuring Red Sea ports, making it more difficult to obtain ships. This undermines transportation reliability and damages reputation. Circumnavigating the African continent, on the other hand, increases delivery times and tightens competition for vessels.
The adverse effects also impact the competitiveness of client companies, potentially resulting in a loss of market share. Companies’ profitability suffers unless the increased costs can be passed on to prices. However, some Far East customers have, on a case-by-case basis, understood the challenges posed by the situation and prepared for extended delivery times.
An unresolved crisis could be costly
If the crisis persists, it could result in a complete cessation of lumber transport to some eastern Mediterranean countries. Extended freight times will lead to increased costs and competition for container ship capacity and the containers themselves.
If solutions are not found for the conflict in the Suez Canal and the Red Sea, the competitiveness of forest industry companies may deteriorate in the long term, even permanently, due to the difficulty of transportation and the higher price level. As the crisis prolongs, the pressure on companies to pass on at least some of the costs to the selling prices increases, whether this is possible or not. This will necessitate finding and accessing alternative markets for products destined for Asia, which in turn could result in oversupply in Europe.
The effects on competitor countries are similar
The crisis in the Red Sea is expected to equally affect the major competitor countries in the mechanical forest and lumber industries. Producers in regions such as North and South America, Australia, and New Zealand may benefit from the situation, but the benefit may be limited. Significant additional quantities may not be available because supply may not be able to respond quickly to increased demand.
The situation in the Suez Canal and the Red Sea could benefit producers in Russia and Belarus, who are dealing with sanctions as well as production and logistics issues. However, internal problems in these countries could outweigh the benefits of the crisis and limit the increase in deliveries.
The situation concerning competitors could also result in delays in the delivery of raw materials needed for production processes. Replacing maritime freight with air freight from Asia would significantly increase costs and pose a major operational risk, especially if production needs to be suspended due to a shortage of raw materials.
