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Iim Abdurahim, logistics manager, PT. Bukit Muria Jaya
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Muhammad Uzair, general manager, Falcon Tobacco Company Pvt. Ltd.
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Robert Pye, c.e.o., Filtrona
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Lorna Lopez, sales director, FLAVORIQ
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Christian Adi Njoto Njoo, president, PT. Mangli Djaya Raya
Attacks on commercial shipping in the Red Sea have disrupted trading for some companies; but not for others.
On February 19, a Belize-flagged, British-registered cargo vessel in the Gulf of Aden had to be abandoned by its crew after being struck by several missiles fired by Yemen’s Houthi insurgents, the BBC reported. At press time, this was one of the most damaging attacks yet carried out by the Iran-backed movement against commercial shipping in the Red Sea, a crucially important waterway that, through the Suez Canal, connects Asia to Europe, the Middle East, and much of North Africa.
Since mid-November 2023, the rebels, who are presently controlling more than two thirds of Yemen, have launched dozens of missiles and drones at international merchant vessels in what they claim to be a show of support for the Palestinians in Israel’s war against Hamas. Counter strikes by Western warships have so far done little to eliminate the threat. The Red Sea route, which accounts for about 12% of global seaborne trade (and roughly 30% of all container shipping), is particularly essential for the exchange of goods between Asia and Europe.
The persistent attacks have reportedly prompted many shipping companies to either temporarily suspend their shipping through the Red Sea bottleneck altogether or re-route their vessels around the Cape of Good Hope, which adds more than 4,000 nautical miles to the journey. As a result, prices for 40-foot containers have reportedly skyrocketed by up to 400% in some cases.
The situation affects exports and imports of all goods and commodities, including raw tobacco, finished tobacco products, and manufacturing supplies particularly on the Asia-Europe route and, to a somewhat lesser extent, to the Middle East and North Africa. To assess the impact, Tobacco Asia interviewed a select group of top executives from various tobacco industry sectors. As it turned out, but not unexpectedly, companies that rely on heavy bulk shipping, such as tobacco exporters and packaging suppliers, generally appear significantly more impacted than firms whose trade volumes allow for airfreight logistics.
All of our panelists were asked the same four questions:
- How, if at all, have the Houthi attacks on commercial shipping in the Red Sea disrupted your business?
- Which of your of products, if any, are particularly affected and what contingency measures have you implemented to continue trading?
- What are the consequences of the situation and how are your trading partners and customers reacting?
- Was the situation foreseeable or did it hit you by surprise?
Here are our panelists’ answers, edited for better readability and ordered alphabetically by company name:
Iim Abdurahim, Logistics Manager, PT. Bukit Muria Jaya (BMJ), Indonesia (Packaging & Paper Manufacturing)
“The Houthi attacks on commercial shipping in the Red Sea have had significant impacts on global trade, including exports from Southeast Asia to Europe and vice versa. The Red Sea is a vital water-way… [and] handles] around 30% of the world’s [tobacco product] container traffic. The situation has led to an immediate contraction in marketing capacity and a surge in shipping rates. Avoiding the Red Sea means abandoning one of the most common global shipping routes from Asia to Europe. Sailing instead around the Horn of Africa increases costs. Since the attacks, trade volumes through the Red Sea and Suez Canal have dropped by 40%. [Some] logistics companies are adapting by utilizing a land bridge across the Arabian Peninsula and setting up new shipment hubs in the Mediterranean.
We have taken steps to manage the risk, such as taking out additional insurance to cover potential losses resulting from such attacks. But, due to rerouting, there also might be increased costs and longer delivery times. Especially for shipments from Jakarta to Europe, the OFR (Ocean Freight Rate) almost doubled at the beginning of January 2024, but has remained stable since. However, shipping route disruption also could lead to imbalances in the distribution of shipping containers, potentially leading to a shortage in certain areas. While some of our customers might be understanding of the challenges and willingly accept longer delivery times or higher costs, others might seek alternative suppliers or modes of transportation. In some cases, [we] might choose to absorb the increased costs in order to maintain customer satisfaction.”
Muhammad Uzair, General Manager, Falcon Tobacco Company Pvt. Ltd., Pakistan (Leaf Exporter)
“Our exports to the European market are very affected, our shipments only being 30% of planned volume. Typically, more than 80% of our annual trading volume is destined for Europe, the remainder mostly going to Indonesia and Turkey.
The situation came as a total surprise for us, resulting in sudden changes in transit times and freight costs, the latter having risen nearly 350% since the crisis began. There also is some vessel unavailability. Our customers in Europe are now fearful that there will be a shortage [of raw tobacco] and that procurement prices will shoot through the roof. Some of them have suggested that we hold back shipments for the time being and wait until the situation returns to normal. But for us, that means delayed revenue income, so, yes, we are greatly affected.”
Robert Pye, C.E.O., Filtrona, Singapore (Filter Manufacturing)
“The impact on our exports to Europe is minimal due to our business continuity plans. While there are some delays to the import of raw materials, we are using our network of suppliers located near our customers and our manufacturing sites to minimize the delays and ensure supply security, including alternative sourcing and production and using our reserve inventory. Our global network of 11 manufacturing sites across Asia, Europe, and the Americas enables us to adjust our supply chain accordingly to mitigate the challenges. Furthermore, we have already adapted our supply chain since the pandemic and are in a better position to supply to all regions and ensure business continuity.
The impact is mainly to the supply of cellulose acetate tow between Europe and Asia while locally and regionally sourced tow is not affected. Likewise, the supply of capsules is unaffected. There are longer lead times of between 4-6 weeks for cross-regional sourcing as well as higher shipping costs due to the freight surcharge. We are collaborating closely with our customers to keep them abreast of the situation. We have also offered them various options as part of our business continuity plans to meet their needs. There is minimal to no impact for most of them.”
Lorna Lopez, Sales Director, FLAVORIQ, United Arab Emirates (Vape Flavors Development & Manufacturing)
“For an industry as fast moving as vape, time matters immensely. Most of our customers are located in the US and Europe and tend to prefer much faster airfreight as a delivery method. We have, thus, not seen an immediate effect coming from the sea freight disruption due to this.”
Christian Adi Njoto Njoo, President , PT. Mangli Jaya Raya, Indonesia (Leaf Exporter)
“The situation in the Red Sea has impacted our exports to Europe, specifically to destinations like Belgium and Germany, but also to Algeria. Typically, shipments must now go via the Cape of Good Hope, resulting in higher transportation costs and extended delivery times. Consequently, we are experiencing delays in fulfilling orders, which has affected customer satisfaction and could lead to disruptions in our customers’ supply chains, as well as a potential decline in their future market share for cigars or cigarettes.
There’s little we can do about the situation. It’s beyond our control. And while it caught us somewhat by surprise, we did receive [advance] warnings from our shipping partners, allowing us some time to prepare. However, the extent of the impact is still quite burdensome. Our mitigation efforts primarily involve rerouting shipments and negotiating alternative transportation arrangements. But we do recognize the limitations of these measures and are exploring additional strategies to adapt to the evolving situation. Tobacco leaves are highly susceptible to moisture. Prolonged transit increases the risk of mold and pest cross-infestation, compromising product quality and shelf life.
While our shipments remain relatively stable for other destinations, the situation has brought about several consequences for our shipments to North Africa and Europe. Besides significant delivery delays and higher transportation costs, there also are container shortages, further exacerbating the challenges we face. Our customers have expressed frustration with the delays and increased costs, but they understand the external factors at play. Nonetheless, we are actively working to minimize disruptions and maintain open communication with our customers to address their concerns.”
Tobacco Asia also spoke to a leading Chinese manufacturer of vapes and heated tobacco products (HTPs). Requesting strict anonymity, the company expressed concerns that negative news could unsettle its shareholders and customers alike. While a spokesperson for the company disclosed that there were “some disruptions from the Red Sea issue, especially before Chinese New Year [February 10],” our interviewee quickly added the company didn’t think it will be a long term issue and that “compared to the Covid-19 period the negative effect on cost and delivery time is much less.” Despite reports of continued Houthi attacks on shipping in the area, the spokesperson also claimed that “right now everything is going back to normal.”
The firm’s downplaying answers must be taken with a good measure of skepticism, of course. Many Chinese e-cigarette firms are highly reliant on the European and Middle East markets that drive their product turnover. Shipping large volumes of e-cigarette consignments via airfreight would be too costly in this enormously competitive business segment contested by literally hundreds of companies. Sea freight, thus, seems the only viable option even under current circumstances, including longer lead times and higher cost.