The ongoing Red Sea shipping crisis, sparked by Houthi rebel attacks on cargo ships and tankers, has led to a significant number of vessels bypassing the Suez Canal, a vital global waterway. Instead, these ships are compelled to take an extensive detour around southern Africa, adding approximately 4,000 miles to each journey. This considerable rerouting substantially prolongs transport times and escalates freight costs. However, the critical question arises: will this crisis cause further disruptions in the container shipping industry and intensify concerns about inflation? In today’s blog we are going to talk about the implications of the Red Sea Shipping crisis on the sea freight forwarders and the steps being taken by the container shipping industry to avoid it.
The consequences of avoiding the Red Sea shipping route
Opting to circumvent the Red Sea and opt for the longer journey around the Cape of Good Hope presents its own set of challenges. This detour adds approximately 3,500 nautical miles (4,000 miles/6,500 km) and extends the sailing time by 10-12 days for each trip. The consequences include the necessity for extra fuel (with estimates suggesting an additional $1 million/£790,000 in expenses), potential adjustments to alternative ports of call, modifications to delivery timetables, and an overall increase in costs. Despite these challenges, many companies are choosing this route as a safer alternative to the potential risks associated with missile attacks and hijackings in the Red Sea.
The decision to steer clear of the Red Sea has placed container lines in a challenging position, compelling them to urgently secure additional ship rentals for the extended journeys required to bypass the region. In essence, the shipping industry’s adjustments to avoid the Red Sea crisis may introduce complexities and disruptions throughout the global supply chain. This could influence trade patterns and contribute to fluctuations in product availability and pricing.
Impact on the automobile sector
Several auto plants in Europe have already halted their manufacturing process temporarily due to delays in acquiring car parts from Asia. Producers of automobile parts, especially those heavily reliant on exports from China to Europe and the U.S., are also feeling the impact.
The Automotive team at J.P. Morgan underscores that the ongoing crisis is putting the resilience of the auto supply chain to the test, especially concerning new-energy vehicles (NEVs), a crucial component of China-Europe trade. China predominantly exports NEVs to Europe, typically transported by sea. Depending on the evolving situation in the region, there might be fluctuations in shipping times and prices throughout the year. It’s anticipated that traffic in the Red Sea may continue to experience a downturn in the foreseeable future.
Impact of the crisis on the rates in the container shipping industry
Nora Szentivanyi, a Senior Economist at J.P. Morgan highlights that diverse aggregate measures of container shipping costs have risen significantly, reaching two-and-a-half to three times their early December levels. Particularly on routes accustomed to traversing the Suez Canal, especially from Asia to Europe, prices have experienced an almost five-fold surge. Additionally, costs from China to the U.S. have more than doubled.
Juadah Levine, Freightos Head of Research, suggests that the introduction of new rates and surcharges by carriers may result in short-term prices for the Red Sea lane exceeding $6,000 per FEU (Forty-foot Equivalent Unit) as volumes are projected to shift to the West Coast. While the seasonal lulls post the Lunar New Year in late January might lead to reduced rates in late February, it is anticipated that prices could remain elevated until Red Sea container traffic returns to normal levels. These rate and surcharge adjustments underscore the ongoing challenges and disruptions in maritime routes, significantly impacting shipping costs and trade patterns in the affected regions.
While the most significant impact has been observed along Asia–Europe shipping lanes, costs along alternative routes may also increase as capacity is redirected. This situation could worsen if shipping orders are rescheduled in anticipation of prolonged delays.
Consequently, retailers heavily dependent on sea freight might experience challenges. Although most retailers in our coverage have hedged their freight exposure and secured rates at more typical levels for at least the first half of 2024, some freight partners have renegotiated contracted rates downward. This implies that upward renegotiations could be a possibility in the current scenario.
How the addition of new container ships can help to mitigate the crisis
Shipping companies are optimistic that ocean freight operations will adjust to the Red Sea disruption before the 3rd quarter of 2024, coinciding with the peak season for retailers in the US and Europe. The influx of new vessels comprises over one-third of the container shipping industry’s capacity, marking a significant expansion before the surge in new ship orders commenced. Anticipated to be delivered by the end of the year, these vessels will enhance Maersk’s shipping capacity by 9%, while MSC is fortifying its fleet capacity by 39%, and CMA CGM by 24%. Vincent Clerc, the CEO of Maersk, expressed confidence, stating, “It is, therefore, just a matter of time until the capacity issue is fully resolved.”