Red Sea: what outlooks and protections in the agreements for Italian companies

Since January of this year, the China-Italy route, notwithstanding the physiological and periodic drop in transits, linked to the suspension of supplies on the occasion of the Chinese New Year, has seen a reduction of more than 50 per cent in transits for the Red Sea (-50 per cent for the Bab el-Mandeb strait passage; -39.3 per cent for the Suez Canal), with a more than proportional increase in those for the Cape of Good Hope, which have grown, compared to the same period last year, by more than 85 per cent. This 'diversion' has led to an increase of 15 days in the average distance travelled on the aforementioned route, with an automatic increase in costs both for shipowners (in terms of personnel fees and fleet wear and tear), and for the Italian companies themselves in terms of an increase in the timing of procurement of semi-finished and finished products, container freight costs (which have risen from Euro 1,500 to Euro 12,000 and now stand at Euro 6,000 each, an increase of 200 percent) and insurance costs for shipments that continue to transit the Red Sea, which have increased up to seven times since the beginning of the crisis. 

The decline in transit traffic to the Red Sea is already producing its effects at all economic levels. Starting with the logistics chain, with the trend towards its shortening through the search for production sites in Eastern Europe by European and Italian companies, already active in the aftermath of the end of the acute phase of Covid in the 'reshoring' process; as well as with the implementation of overland transport to and from the East, especially in the non-perishable goods sector; and finally in the choice of splitting the supply of products into several shipments and on different routes, so as to reduce the risk of loss, but with multiplication of organizational costs. 

At the level of production organization with the shift from the 'Just in Time' system (whereby the company produces and stores only according to goods already ordered - sold) to the 'Just in Case' system (whereby the company produces, procures raw materials and/or stores finished products in advance, independently of actual orders so as to always have sufficient stocks to meet demand), thus with the newfound centrality and need for warehousing and the correlated increase of this cost item in company budgets. Finally, at the retail level with the increase in prices of finished products for end consumers, already suffering from the almost exponential growth of inflation. 

The effects of this crisis should also not be overlooked on a purely legal level. Regarding the agreements, especially supply and transport agreements, great attention must and will be paid, also pro-future, to clauses regulating, first and foremost, the termination and/or renegotiation of contractual conditions, with the insertion and strengthening, for example, of clauses shaped on the notion of 'hardship' (a concept that allows the renegotiation of contractual conditions, upon the occurrence of a worsening of the original contractual balance that does not make performance impossible but only excessively onerous for one of the two parties, such as an exponential increase in transport or insurance costs); as well as in the distribution of risks especially in the transport of goods, through the choice of the Incoterms most suitable to the situation and to the party to be protected; and finally in the inclusion among the causes of “force majeure” and therefore of impossibility of performance, also those related to war, terrorist acts and the interruption of trade in a specific high-risk area. This concept will certainly have to be declined, also in terms of validity, depending on its commercial counterpart, in the light of its different meanings in international legal systems.

Equally important is the issue of guarantees, both in the procurement phase of the products to be marketed and in that of the supply of the finished product to large-scale distribution. There is no doubt that the stipulation of guarantees with banks or insurance institutes, while representing an additional cost item for importing companies, constitutes, in a context of great uncertainty in the timely and correct fulfillment of the supply as it is today, an indispensable policy against the risk of incurring penalties and/or claims for damages, equally substantial, for the delayed and/or failed supply of the goods to the market. 

Last but not least, there is the issue of the survival of many Italian companies, which unquestionably intersects with the economic issues already mentioned. In the last three months, the Italian economic enviroment has lost 3.3 billion Euro, 95 million Euro per day (of which 35 million in lost exports and 60 million in lost or delayed supply of goods), the effects of which translate into reduced orders, missed transits and ship stops in Italian ports, and lack of road transport of goods unloaded in ports towards the large logistics hubs, to the greater advantage of those located in Northern Europe. It goes without saying that the continuation of the crisis can only aggravate the structural weakness and the accounting and financial resilience of many Italian companies.

There is certainly an urgent need for measures to support companies, but also for a rethink and careful, professional planning of the production and supply systems of Italian companies in order both to cope with the current crisis and not to be unprepared for those to come. ​​