Red Sea crisis diverts attention back to shipping

Suez Canal diversions will inflate container shipping costs for as long as the situation lasts, but trade always finds a way, even if it takes a bit longer than usual.
Inevitably, public interest in the global supply chain increases whenever there is a major disruptive event that threatens shortages of goods and/or raises costs for consumers.
While those of us who work in the shipping and logistics world like to champion its critical role in the global economy, it is entirely understandable that it mostly exists in the shadows, given that everything usually works as it should in an understated manner.

The pandemic and Ever Given Suez Canal blockage raised public awareness to new heights in recent times but it faded from view as soon as shipping started working more smoothly and freight rates fell.

However, two prominent risks to container shipping (and all other shipping sectors for that matter) have sadly become real and have put shipping back into the limelight.
The first risk emanates from geopolitical factors, exemplified by carriers deciding to avoid the Red Sea and Suez Canal following a series of attacks on ships by Yemen’s Houthis rebels in support of Hamas in the war with Israel.

Simultaneously, the second risk arises from the spectre of climate change, here exemplified by the Panama Canal reducing its capacity in a bid to preserve levels in the canal’s watershed.
The realisation of these twin risks has created a metaphorical pincer move that threatens to overturn all of Drewry’s previous predictions about the container market’s direction and balance of power.

It is important to state that neither canal is formally closed but faced with a very real physical danger to crew and assets (Suez) and capacity restrictions and potential operational delays (Panama), carriers must quickly decide if the risk is worth it and if not, plot a new course asap.

There was some flip-flopping but as of today the vast majority of container services have stuck with the original decision to take the long way around the Cape of Good Hope.
Liner network planners have to weigh the trade-offs when redrawing Asia-North Europe services, looking for the sweet spot that minimises additional time, disruption and cost.
Sailing via the Cape of Good Hope means unavoidable extra nautical mileage – the distance from Singapore to Rotterdam via the Cape with no other ports in between, for example, is nearly 3,600nm longer than going via the Suez Canal (8,300nm).

Longer distance doesn’t have to mean longer transit times. If carriers want to keep sailing days close to normal when routing via the Cape of Good Hope they can steam at faster speeds but that will incur significant extra cost (fuel and vessel mostly), which might not be recoverable from higher freight rates.

When sailing from Singapore to Rotterdam around the Cape, if ships increase the speed to 19 knots, they can match the Suez transit at 13 knots.
However, given that carriers are in cost-saving mode and that there is a surplus of ship capacity, it’s improbable that ships will be set to maximum design speeds.
There are numerous variables that will determine the additional voyage costs from diverting via the Cape. The mains ones are changes in speed, the number of ships deployed and the number of ports called.

Every service is different in its make up so there is no-one size answer but based on a representative Asia-North Europe service via Suez and assuming no change in fuel prices or port rotations other than the Cape rerouting, Drewry performed a comparative analysis of round voyage costs for various scenarios (further information on the cost comparisons by route is available from the Drewry Container Forecaster and from our consultancy team):

Scenario 1: Similar speed from last port Asia to first port Europe = 3 percent increase in total round voyage cost
This scenario requires two additional container ships to maintain a weekly frequency. A longer round voyage adds 33 percent to the fuel bill and 18 percent to vessel costs, nearly offset by canal toll savings.

Scenario 2: Similar transit time from last port Asia to first port Europe = 21 percent increase in total round voyage cost
This scenario requires increasing the speed from last port/first port by over five knots, which would effectively double the total round voyage fuel cost.
In our view carriers will adopt strategies somewhere in between those two scenarios but whatever approach they adopt there will be additional cost.
There are other things that carriers can do to keep transit times between key ports competitive, including cutting smaller ports and changing the sequencing so that bigger ports at both ends of the service are closer to one another in the rotation.

New services will have to include much clearer demarcation when it comes to their regional coverage. A number of Asia to North Europe services previously made stops in the East Mediterranean, most notably Piraeus in Greece (Ocean Alliance), before heading to North West Europe ports.
That was fine when ships were passing by that area anyway but it won’t be feasible to maintain those calls via the Cape of Good Hope as the detour would add too much distance and time. It is likely that from now on the East Med region will be served by more trans-shipment via more westerly hubs in the basin.

While our comparative analysis suggests that there should only be a minimal increase in round voyage costs, spot market freight rates on Asia to Europe trades have soared. Drewry’s World Container Index (WCI) Shanghai to Rotterdam subset has increased by 246 percent (to US $ 4,951 per 40ft container) since major carriers first announced they would divert in mid-December.

Excluding the pandemic years 2020-22, at US $ 3,777 per 40ft container the composite WCI value for January 18, 2024 is the highest on record (series starting 2011).
According to our shipper clients in the Drewry’s Benchmarking Club, carriers have advised that they should not consider the additional operational vessel costs alone but also the associated extra costs, such as higher insurance and the cost of military escorts.
New surcharges related to the Suez crisis have quickly appeared under different nomenclature, including Transport Disruption Surcharge, Emergency Operation Surcharge and Contingency Adjustment Surcharge, to name just three.

It’s a confusing alphabet soup for shippers, not helped by the lack of guidance about how the numbers are derived. Shippers essentially have to trust that carriers are not profiteering and are accurately summing up the surcharges. It is far from ideal being asked to pay more for something without knowing what exactly you are paying for.
One carrier told Drewry that because many of the additional costs related to the Suez Canal diversion are dynamic, it is very complex to breakdown and itemise all of the various cost components that make up the overall surcharge price at any given time.

These could involve things such as additional equipment utilisation days, implementation and use of added shuttle services, the effect of Emission Trading System (ETS) due to additional bunker consumption, cost incurred due to higher sailing speed, additional storage charges, additional cost for crew being onboard for longer voyage, pre/on carriage inefficiencies, unplanned and need for more transhipments, the carrier said.

Two of the most frequently asked questions we receive from media concerning the situation are: how high will freight rates go and will consumers feel this?
Our stock answer has been that rates will remain elevated for the duration of the crisis, which is uncertain but that they won’t go so high to stoke inflation.
Our rationale is that the current situation is only partly comparable to the pandemic.

During lockdowns there was a surge in demand for physical containerised goods, which when coupled with logistics capacity shortages sent shipping costs into orbit.
These days demand is much more pedestrian now that government stimulus has wound down and spending habits have reverted back to services as we’ve all been let out to play.
Also, the surplus of containerships is much greater today than it was during the pandemic; that’s bad news in normal times for carriers but it provides more resilience to cope with disruptive events.

The big question – at least for those of with long-term interest in the shipping market – is whether or not this situation will come to the rescue of carriers?
Certainly, for however long this lasts, it will change the prior narrative of the market being heavily over supplied with expectations for further decreases in freight rates.
Disruption is a proven recipe for driving up shipping costs and the more chaos it causes, the bigger the freight rate inflation will be.

There is a risk that the ship diversions will cause ships to cluster at ports upon arrival in Europe, leading to port congestion and eventually worsening equipment shortages and gaps in sailings. These effects may impact global supply chains but it shouldn’t be anything like as bad as seen during the pandemic when Covid snarled up the entire end-to-end supply chain.
Affected markets will be much tighter than they otherwise would have been but there is sufficient spare capacity in the system to cope (see idle fleet or other over-supplied trades). Obviously, it takes time to reposition ships so the pinch will be worse at this initial stage but things should ease once everything is in place and liner networks recalibrate to account for planned diversions.

The impact on the world economy, if any, will come more from higher energy costs than higher freight rates but so far this hasn’t materialised. That could change if the situation escalates in the region and oil prices increase dramatically.
In the worse-case scenario, whereby Suez has to be avoided for the entirety of 2024, assuming a 30 percent increase in trade distance for the roughly 30 percent of container ship capacity that previously transited Suez, that would reduce effective capacity by some 9 percent.
That would only improve our Global supply-demand index to a reading of 82, indicating a still heavily oversupplied market (anything above 100 is a tight market, anything below signifies overcapacity).

Therefore, while the situation will impact some trade more than others, on a global level it won’t completely flip the supply and demand story.
In the best-case, if trade starts to flow through Suez again shortly, the normal market dynamic will almost immediately snap back into play and prices will ebb, as too, sadly, will public interest in this fascinating sector. 

(Hellenic Shipping News Worldwide)