Soaring Shipping Rates & the Red Sea Crisis

“Day 214 of the Red Sea crisis – and other news Two different merchant vessels reported attacks from the Houthis in the Red Sea yesterday” - Read the recent post by Lars Jensen. It’s quite interesting to see the markets efficient capacity to cope as the global trade continues-with some providing merchant vessels protection while many changing routes or looking for other alternates. The recent developments globally have significantly pushed the cost of shipping higher – with container prices almost 3 times (~297%) of prices seen last year same time. Although these events have not been extensively covered by mainstream media, they are crucial, particularly concerning inflation risks. The cascading effects of the turmoil in the Red Sea have forced ships to take longer routes around the Cape of Good Hope, leading to significant congestion in ports, especially in Singapore.

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Current State of Freight Prices:

The World Container Index (WCI) is a composite index of container freight rates on eight major routes to/from the US, Europe, and Asia. Developed by Drewry, a maritime research and consulting firm, the WCI provides a snapshot of container freight rates on the most important trade routes. Compared to July 2023, the container index is up almost 300% as recorded on 11th July’24.

From May 2024 to July 11th, 2024, the index rose from $2,725 to $5,900 for 40-foot containers. Trades from East to West, especially those originating from China, seem to be particularly under pressure with soaring shipping rates.

Plotted: World Container Index

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Recent Developments:

As market dynamics are influenced by a lot many factors, this report aims to provide insights on the demand, supply, geo-political developments, the operational disruptions and innate ability of markets to cope with these developments.

Beginning with demand, the demand for ocean freight container shipping hit an all-time record in May – almost 15.9m TEU* of 20ft-equivalent container shipped globally. Even when compared in bit longer time frame, first five months of 2024 marks the highest amount of shipped containers compared to the same period any other year in since 2019 (Refer chart 3.1 below). Even the Ocean Freight market is consistent in showing growth monthly basis compared to previous year.

This growth is resultant of not just the global trade demands but also the operational disruptions mentioned earlier.

Operational Disruptions: Red Sea Impacts

Last 6-7 months have experienced the heavily discussed tensions in the Red Sea, intensifying ripple effects on maritime shipping and global supply chains. Ships are being temporarily diverted around the Cape of Good Hope, significantly increasing transit times and operational costs. Regular service reconfigurations and volume changes have pressured infrastructure, contributing to port congestion, delays, and capacity and equipment shortages. Despite these challenges, demand for container shipping has remained strong.

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???????? Fallout from the Red Sea:

o?????????? Before the attacks towards the end of 2023, 12% of global trade passed through the Suez Canal.

???????????? Recent figures show that the number of ships crossing through the canal has plummeted by 66% since carriers began diverting vessels around Africa.(Refer chart 3.2 above)

* TEU- Twenty Feet Equivalent is a general unit of cargo capacity often used for containers shops and ports. It is based on the volume of a 20-foot-long container.

Adding to supply side pressure, congestion at Singapore’s container port is at its worst since the pandemic.

This congestion is spreading to neighboring ports, including Malaysia. Singapore port is the second largest container port in the world. Normally, container vessels experience a maximum half-day wait for berthing, but now they have to wait up to a week. Currently, 380,000 TEUs are delayed, down from 450,000 TEUs in late June 2024.

This year, congestion at Singapore Port is primarily caused by ships returning to Asia off-schedule after longer voyages around the African Cape due to the Red Sea crisis and missed weekly sailings. The diversions have caused ships to arrive in Asia unpredictably, exacerbating congestion at Singapore’s port. Carriers are grappling with a shortage of tonnage to handle the extended transit times due to the Red Sea diversions, leading to significant delays.

As per DHL- demand is very strong on the Asian outbound lanes and is expected to remain elevated for the next 3 months. Container demand has been consistently exceeding the available supply leading to a spike up in prices of outbound freight from Asia.

?Other than the congestions around Asian ports, Port union strikes are a major threat on the US East Coast. The International Longshoremen's Association contract covering 45,000 dockworkers at three dozen ports stretching from Maine to Texas expires on 30th September 2024. If there is no deal by then, the union could call a strike during the vital holiday container shipping season, impacting the labor-friendly U.S. President Joe Biden's bid for reelection. Labor tensions are also on the rise in the economies such as Germany & France further escalating the congestion concerns.

The winter months from June to September, though mild compared to Europe, bring unpredictable weather with strong winds and storms, often referred to as the “cape of storms.” This has resulted in a sharp fall in containerships passing the Cape in recent days. The conditions were so severe that the crew of the ship named “Ultra Galaxy” was forced to abandon ship after it began its voyage through the rough seas. While temporary, this has added up to three days of additional sailing time, as per Lloyd’s List Intelligence.

?Drastic fall in containership passing due to bad weather around the cape of good hope. Second image highlighting the shipping routers from Asia.

Geo-politics: Tariffs China maintains a significant share of the EV and critical minerals supply chain and has imposed export restrictions on key minerals, including battery-grade graphite. The critical minerals tariffed include manganese ores and concentrates, cobalt ores and concentrates, aluminum ores and concentrates, radium, uranium and its compounds, alloys and mixtures, tungstates, and other critical mineral products. Crucially, the announcement of new tariffs did not include tariffs on gallium, germanium, and rare earths, for which China is virtually the only producer. The US meanwhile has imposed fresh tariffs on Chinese products and there is a rush to secure these supplies before tariffs come into effect. Considering the play of Tariffs, there’s been discussion on front loading of a lot of shipping further adding on the overall demand.

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Capacity:

Strong demand does entail capacity enhancement, but in this case even after positive capacity addition the effective increase in capacity is not visible. There was an expected increase of approx. 10% in the capacity in 2024 but the congestions, route issues and other concerns have effectively led to a decrease in the overall capacity available by 11%.

Conclusion: Strong demand for containers from Asia along with other factors like port congestions, tariffs and weather around the alternate route, capacity constraints & geo-politics may keep supply side inflation pressures high. Although port congestions and weather remain temporary factors, the structure factors of excess demand over capacity of containers can keep container prices elevated compared to the pre-Covid timeline in the shorter tenor. These challenges will keep inflation risks alive as the global trade might see some decrease further putting pressure on the prices due to the supply side constraints.

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?Prepared By:

Shikhar Garg

Vice President-Treasury Markets

Almus Risk Consulting LLP

Swaraj Rajagopal

Senior Analyst – Treasury Markets Almus Risk Consulting LLP

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