Brace for increased shipping rates as lines avoid Red Sea

Maersk announced on December 19th that all vessels previously paused and due to sail through the region will now be re-routed around Africa via the Cape of Good Hope for safety reasons.

Recent missile attacks by Houthi militants in the Red Sea have prompted leading shipping entities like CMA CGM, Hapag-Lloyd, Maersk, and Mediterranean Shipping Co. to temporarily halt transits through the Suez Canal. Additionally, the Panama Canal has been effectively closed to MPV (multipurpose) shipping until at least May, leading carriers to explore alternative routes via the Cape of Good Hope and the Strait of Magellan.

In response, the US Department of Defense announced the launch of Operation Prosperity Guardian which will work alongside existing navy assets in the region to address the Houthi threat and will include support from the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain.

Four of the top five largest container carriers will be avoiding the Red Sea and the Suez Canal until security is restored to the waterway. Together with ZIM who was already diverting their Red Sea traffic, these carriers represent 56 percent of global capacity, meaning an estimated 17 percent of global volumes will be taking a longer, more expensive route from Asia around the southern coast of Africa

Container diversions will take an extra seven to 14 days in transit time depending on the lane, and mean a 15 to 20 percent increase in costs for carriers. In addition to longer voyages and higher costs, disruptions to scheduled arrival times could cause congestion at destination ports and some equipment shortages as empty containers take longer to get back to origin ports.

“The situation in the Red Sea has been escalating quite significantly over the last two weeks where Houthi rebels have started to attack the commercial vessels by the big ocean liners. Subsequently the container liners are essentially instructing their vessels to avoid transiting through the Suez Canal and around the Cape of Good Hope adding quite a significant delay and time to their East to West trade journeys,” said Christian Roeloffs, cofounder and CEO of Container xChange.

Container xChange reported about the potential disruptions and implication on the Suez Canal in October this year right after the start of the Israel – Hamas – Palestine conflict.

“Now the shares of shipping lines have jumped in anticipation of a post-COVID disruption revival. It will all depend on how navies take this up. Egypt has a significant commercial interest in the functioning of the Suez Canal as it is one of the main revenue drivers and if the diversion happens then it will have a significant impact there,” Roeloffs added.

He pointed out the havoc caused when the Ever Given got stuck in the Suez Canal, disrupting shipping for months and causing rates to climb.

“The Red Sea, especially with the Suez Canal, is like a superhighway for shipping containers, connecting different parts of the world, particularly Europe, Asia and Africa. However, recent disruptions are poised to escalate operational costs, adding significant strain, while concurrently exerting downward pressure on profits. It marks a disheartening beginning to the strategic planning for the year 2024,” Roeloffs said.

The Red Sea trade route is strategically significant due to its role in connecting the Mediterranean Sea to the Indian Ocean, providing a shortcut for ships travelling between Europe and the countries in Asia and Africa. The 193 km-long canal accounts for 12 percent of global trade, including 30 percent of all container movement. A huge amount of Europe’s energy supply, palm oil and grain come through the Suez Canal Waterway which also gets impacted by these attacks and subsequently by the disruptions thereafter.

Impact on container shipping

A the lines look at schedules, they will have to make adjustments to factor in the longer routings. Delays in shipments through both the Suez and Panama Canals could affect delivery timelines.

“About 30 percent of Israeli imports come through the Red Sea on container vessels that are booked two to three months in advance for consumer or other products, meaning that if the voyage will now be extended, products with a shelf life of two to three months will not be worth importing from the Far East,” said Yoni Essakov, who sits on the executive committee of the Israeli Chamber of Shipping.

“Importers will need to increase stock due to the uncertainty and pay much more and others will lose out on their markets as time to market is not competitive,” Essakov added.

CMA CGM declared force majeure in announcing it was rerouting its vessels. War risk premiums are likely to rise, affecting carriers and potentially leading to increased freight costs. Alternative routes, such as the longer Cape of Good Hope, will incur higher operational expenses.

Trans-Pacific trade is also affected. The closure of the Panama Canal may shift market dynamics, impacting routes and cargo volumes. The North American West Coast is expected to regain market share as carriers adjust their strategies.