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Freight Rates Are Ballooning to Pandemic Highs 

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Freight Rates Are Ballooning to Pandemic Highs 

Just as peak shipping season begins, a container capacity crunch could push rates to higher levels than previously seen with the Red Sea spike. Since January, major shipping and transportation firms such as DHL have been sounding the alarm over a pending container crunch. The Houthi attacks resulted in longer routes with more containers at sea and unavailable to be reloaded. Couple this with inclement weather impacting Chinese, Malaysian, and Singaporean ports, and the crunch is causing freight spot rates to jump as much as 30% over the past couple of weeks. 

Read also: Container Rates Surge Amid The Red Sea Crisis

The pandemic gave rise to some of the most severe capacity crunches in recent memory. Freight forwarders were pushed to premium rates just to acquire space guarantees, and the current environment is shaping up similarly. During March and April, many carriers were able to rely on idle vessels to offset some of the longer voyages and keep containers transiting at a reasonable pace. The result, however, is little, if any, excess capacity in the market. 

Earlier in the year, the previous high for a container was between $3,000 and $5,000. Rates at that time were nearly double those a year earlier. One of the factors driving inflation during the pandemic years was logistics price increases. The consumer ultimately pays when freight rates increase, and current events suggest a similar pattern moving forward. 

MSC had already announced rates of $8,000 to $10,000 for 40-foot containers en route to the US West Coast, while Wan Hai will be charging for “space protection.” Drewry, the maritime shipping research firm, noted a total of 17 canceled sailings between the last two weeks of May and the first two weeks of June on the Transpacific route, and logistics managers were rumored to be moving up peak season from July to June in an attempt to get ahead of any delays.   

Adding to the complexity, a potential strike or significant labor slowdown is on the horizon at the US East Coast and Gulf ports in the fall. A looming threat that could disrupt operations significantly, much depends on upcoming negotiations between the International Longshoremen’s Association, who represent the ports, and the US Maritime Alliance. 

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Explosion Near Yemen’s Mokha: Vessel Sustains Damage but Crew Safe Amid Rising Tensions

An explosion reported near Yemen’s Mokha has caused damage to a vessel, yet fortunately, the crew remains safe as they continue towards their next port of call, according to the United Kingdom Maritime Trade Operations (UKMTO) agency. Concurrently, British maritime security firm Ambrey has revealed that a Malta-flagged container ship in the same vicinity was allegedly targeted with three missiles while en route from Djibouti to Jeddah, Saudi Arabia.

The incident occurs against the backdrop of ongoing hostilities in the region, with Iran-backed Houthi militants launching drones and missiles against international commercial shipping in the Red Sea since mid-November. Claiming solidarity with Palestinians against Israel’s military actions in Gaza, these attacks have disrupted global shipping routes, necessitating longer and costlier journeys around southern Africa.

Ambrey has further assessed that the targeted vessel may have been singled out due to its listed operator’s trade relations with Israel. In response to the escalating tensions, both the United States and Britain have conducted strikes against Houthi targets. As the situation unfolds, concerns mount over the safety and security of maritime traffic navigating through the volatile Red Sea region.

crane african red sea

Impact of Red Sea Attacks: African Nations Brace for Inflation Surge

African countries are poised to experience heightened inflation levels and sustained interest rate tightening throughout 2024 due to disruptions in global trade caused by attacks on shipping lines in the Red Sea by Houthi Rebels. This prognosis is outlined in a comprehensive report compiled by Afrexim bank, examining the repercussions of the Red Sea attacks on African trade and macro-economic stability.

The report underscores the mixed impact of the global trade disruption across the continent, with Egypt facing a notable reduction in traffic around the Suez Canal, while South Africa grapples with increased traffic and port pressure due to vessel rerouting through the Cape of Good Hope. Furthermore, the surge in freight costs is expected to permeate consumer goods prices across Africa, exacerbating already elevated inflation levels and potentially prompting further interest rate hikes by Central Banks, which could impede economic growth.

The disruption in the worldwide supply chain, coupled with soaring prices for food and energy, may incentivize local manufacturers to divest from the region if production costs surpass those of competitors in other continents, leading to a projected contraction in Africa’s trade volume by mid-year.

It’s crucial to note that the Red Sea serves as a vital global trade route, accounting for approximately 15% of global shipping traffic, connecting Europe, the Middle East, and parts of Africa. Since November 2023, Houthi Rebels have targeted commercial ships in response to Israel’s actions against Palestinian civilians, resulting in significant disruptions in international trade and the suspension of transit operations by major shipping companies like Maersk, Hapag-Lloyd, and MSC.

African countries have already been grappling with elevated inflation levels exacerbated by the ripple effects of the Covid-19 pandemic and Russia’s war in Ukraine. According to the African Development Bank (AfDB), around 18 countries on the continent closed 2023 with double-digit inflation, further straining consumer spending among vulnerable populations. In response, African central banks have embarked on a monetary policy tightening spree in 2024, with countries like Nigeria, Egypt, Kenya, and Zambia increasing their Monetary Policy Rates (MPR) as a measure to curb inflation.

In conclusion, the Red Sea attacks have triggered a cascade of economic challenges for African nations, necessitating proactive measures to mitigate the impact on inflation and economic stability in the region.

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Red Sea Global Trade Disruptions: How to Overcome the Chaos

Global trade has faced many recent disruptions lately due to chaos in the Red Sea, which started as a result of the attacks in Gaza. According to the Council on Foreign Relations, about 6% of global trade and 40% of U.S. container ships traverse the Panama Canal yearly. Per the U.S. Naval Institute, 12% of global trade travels the Suez Canal.

The Houthis, a religious movement, began carrying out attacks on cargo ships traveling through the Red Sea and the Suez Canal in November 2023. Vessels are avoiding these attacks in the vital waterway by sailing around Africa, adding time and cost to the trip. 

Perishable items are shipped in containers, but some items are switched to bulk carriers, which may make these items harder to handle at ports. Plus, container prices have risen by 25% or more. Perishable items have a limited life, so the lengthier shipping times can ruin them and make them unsellable. 

Ocean shipping rates are going up, and several carriers have added surcharges. Shipments are delayed, meaning orders may be canceled as customers become unhappy with shipping times. 

The Panama Canal, which could have been an alternative to the Suez Canal, is also experiencing cargo diversions because of the lack of rain, making the canal too shallow for large ocean liners. Authorities expect the canal will limit capacity to 18 slots per day, down from the pre-drought capacity of 30 ships. 

Significant challenges for international trade include: 

  • Restricted bookings on westbound routes have triggered a surge in freight rates, affecting regions in the Middle East, the Red Sea, North Africa, Europe, the East, the Black Sea, and the West.
  • Freight rates have seen a significant spike, with Asia-Europe rates surging 173%, exceeding $4,000/FEU compared to pre-diversion levels. Asia-Mediterranean prices have doubled, exceeding $5,000/FEU.
  • Carriers have introduced surcharges ranging from $500 to $2,700 per container, further driving prices higher. The FMC granted permissions for carriers to circumvent the 30-day notice for increasing rates, allowing them to bill surcharges immediately. 
  • Disruptions in one region can influence distant markets. Several EU-based auto plants have announced temporary production shutdowns due to delays in obtaining parts from Asia. 
  • Due to Panama Canal congestion, a route initially diverted to the Suez Canal will go towards the Cape of Good Hope, adding ten to fourteen days to the journey and extra costs. Shippers now face a dilemma between bypassing the Cape of Good Hope or returning to the Panama Canal with potential queuing delays.
  • Sea-Intelligence estimates a 5.1%-6% reduction in global shipping capacity, equivalent to 1.45-1.7 million TEU.
  • Companies may need to increase ship numbers on each route to maintain schedules.
  • The crisis prompts strategic reshuffling, reminiscent of past trends redirecting ships from European to U.S. routes during surges in freight prices.
  • The crisis could extend into the second half of 2024. The longer the war in Gaza lasts, the more extended shipping disruptions caused by missile attacks in the Red Sea will continue. 
  • Retailers that rely on sea freight could be more affected by the Red Sea disruption than those that source closer to home. Retailers may see longer lead times for specific products as the Red Sea situation continues. 

How to make global shipments happen

Shippers need to find alternative routes to make sure shipments happen. Routes bypassing the Red Sea might be longer but would avoid the crisis zone. Shippers must implement enhanced security measures for vessels, such as hiring private security firms or coordinating with naval forces for escorts. 

Shippers must be flexible as they navigate higher costs, longer transit times, and economic volatility. When risks like this occur, the ability to mitigate risks and deliver to customers is critical. Diversifying the supply chain to reduce reliance on routes passing through the Red Sea can mitigate the impact of disruptions in the region. Shippers must review insurance policies and risk management strategies to ensure coverage for potential regional disruptions. 

Supply chain networks may need to be redesigned with alternate logistics partners, sources, and suppliers. A supply chain network optimization solution answers “what if” scenarios to improve customer service, operational efficiency, inventory management, risk mitigation, and supply chain resilience. Supply chain network optimization solutions use data from across the supply chain to create a mathematical model representing the entire supply chain network. The model considers various constraints, objectives, and decision variables, including facility locations, transportation routes, inventory levels, and production capacities.

The Red Sea crisis is a wake-up call for companies to localize their supply chains. Shippers should have alternative sources of raw materials so they don’t have to rely on a single source for raw materials, which can make the supply chain vulnerable to disruptions. Having multiple sources allows shippers to negotiate better prices and hedge against sudden price increases from a single supplier. Because of the instability of the times, the availability of raw materials can be affected. 

Utilizing technology, such as tracking devices, predictive analytics, and communication systems, can help shippers better navigate high-risk areas and respond effectively to incidents. 

Seizing Opportunities Amid Uncertainties

  • The looming strike threat in the Eastern United States could expedite the return of cargo volume to the US-West Terminal.
  • Large importers may consider advanced shipment plans or opt for the West Coast route to mitigate potential strike risks.

Circumventing the crisis in the Red Sea requires careful planning, agility in your supply chain, and partnerships with logistics providers that can ensure shipments are shipped on time to the correct location. 

source: https://www.nexterus.com/

 

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How The Red Sea Disruption Is Affecting Industry

With several big shipping companies diverting their routes away from the Red Sea due to current conflicts, the delivery of shipping containers and consumer goods is taking longer than usual.

As a result of the ongoing Israel-Hamas war, the Houthi group in Yemen – who is openly backing Hamas – has said it is attacking all ships heading towards Israel. However, it is unclear whether all the targeted vessels are actually travelling to Israel, meaning many shipping firms have opted to avoid the busy shipping lane altogether.

In fact, over the past few months, a number of Maersk and MSC container ships have been assaulted by Houthi rebels, which has reinforced the importance for shipping companies to map out alternative routes for the security of their crew members and container cargo.

So, what does this mean for businesses awaiting commercial deliveries? Cleveland Containers, one of the UK’s leading suppliers of shipping containers, explains how the Red Sea disruptions are affecting industries across the country.

What is happening in the Red Sea?

Since the beginning of the Israel-Hames conflict in October, Houthi rebels have been launching rockets and drones against foreign-owned ships navigating through the strait of Bab al-Mandab. This is a 20-mile wide channel separating Yemen on the Arabian Peninsula side and Eritrea and Djibouti on the east African coast.

Andrew Thompson, Chief Executive Officer of the Cleveland Group, which consists of Cleveland Containers, Cleveland Hire and Cleveland Modular, said, “Generally, ships enter the strait of Bab al-Mandab from the south to cross the Red Sea and reach the Mediterranean via Egypt’s Suez Canal.

“But the threat of potential attacks has forced global shipping firms to amend their itineraries, with vessels now cruising around the Cape of Good Hope (South Africa) and then all the way up the west side of the continent.

“This is causing severe delays to shipping deliveries, as the alternative route can extend transit times to at least two or three weeks. And, in turn, the delays are also having a knock-on effect on the operations of sectors and companies all over the UK, impacting stock availability and delivery pricing.”

What sector is being affected the most?

Many sectors, such as retail and construction, are being significantly affected by the Red Sea disruptions, as companies deal with supply chain logjams due to the rerouting of deliveries.

Manufacturing is no doubt one of the industries that has to tackle the harsh consequences of the ongoing situation, too. For example, at the start of 2024, big automakers such as Volvo, Tesla, and Suzuki had to suspend some production across Europe because of shortages in components.

In particular, the UK manufacturing sector has witnessed a decline in operations in recent times, and the Red Sea problems have contributed to hindering the situation even further. As of January 2024, its purchasing managers’ index (PMI) stood at 47.0, with any reading below 50 indicating a contraction.

The current delays are prolonging expected deliveries, causing disruptions to production schedules and increasing financial pressures at a time when companies are already struggling to make ends meet.

The additional costs behind the Red Sea disruptions

The ongoing disruption in the Red Sea means that the cost of delivering goods worldwide is increasing, too.

The forced change in route has increased sailing times by 30%, leading to a rise in fuel consumption and extended work shifts for ship crews.

Not to mention that shipping companies are facing additional port fees as vessels need to stop more often along the way, as well as higher freight expenses overall.

So, ultimately, this is why businesses across the UK are currently having to spend more money on the delivery of products, items, and materials to keep their operations going.

It is also worth noting that the delays of goods leaving China and other parts of the world are escalating demand and impacting availability. Some sectors might be experiencing significant stocking issues, whereas others may not have the materials they need to fuel their industrial processes.

In short, the Red Sea disruptions are causing a slowdown in production, resulting in lower output and an overall loss in revenue for companies all over the country.

As things stand, the threat of Houthi attacks on vessels in the Red Sea is setting back transit times, increasing shipping costs, and putting the financial wellbeing of several sectors to the test.

While it is difficult to make predictions at this stage, the hope is that the situation will ease over the coming months to restore some sort of normality worldwide.

container chain market

Red Sea Attacks Impact Market Sentiment of Shippers and Exporters in Asia

Against the backdrop of escalating tensions in Yemen, the Red Sea has become a focal point of concern for international trade. 

The Houthi attacks continue unabated. In the past week, we witnessed the most intricate series of attacks to date. Fortunately, the military presence in the region, led by the Americans and the United Kingdom, has proven effective in preventing the missiles and drones from reaching their intended targets. Noted Christian Roeloffs, CEO of Container xChange. 

“This is a nightmare situation for shippers and exporters as freight rates, container prices and insurance costs have escalated. The impact has been significantly deterrent for container vessels since last month, 70-80% of container traffic has been rerouted, especially the larger carriers.” Roeloffs added.

Pre and Post-Chinese New Year Implications

“As Chinese New Year approaches amid ongoing disruptions in the Red Sea, we anticipate a tightening of container availability and vessel space in the pre-Chinese New Year phase. The rerouting via the Cape of Good Hope adds complexity to the situation. We expect freight rates to remain elevated, and supply chain managers will need to navigate ongoing schedule disruptions.

Looking beyond Chinese New Year, we project blank sailings and capacity reduction by carriers. The industry is witnessing a focused effort on resetting networks, leading to tightening of container availability and vessel space. While high freight rates and increased costs pose midterm challenges, our analysis indicates that these disruptions are not likely to be long-term. Rate reductions are anticipated on the horizon due to the structural overcapacity resulting from a severe market imbalance.” – Christian Roeloffs, CEO of Container xChange

Global Impact: European Delays and Varied Effects Across the East

The Port of Eilat, Israel’s toehold on the Red Sea, has seen an 85% drop in shipping activity, its chief executive told Reuters last month. 

The impact of disruptions in the Red Sea is reverberating in Europe, causing delays in shipments. Nevertheless, the persistent supply-demand imbalance has provided a cushion to the shockwaves so far and the rates have not skyrocketed yet to the post COVID, pent up demand levels. 

Chart 1: Container Leasing Spot Rates Trends, Source: Container xChange

“The impact has been distributed across the Far East. The container prices are escalating at a staggering rate, rising by 750 USD in less than two weeks.” Informed a customer from China. 

The freight rates, for instance, from China to Europe are up by 282% from $1243 as on 1st December 2024 to $4757 in the week of 12 January 2023 (Source: Freightos).  

Regional Insights: India’s Uncertainty and China’s Market Dynamics

“There is a lot of uncertainty and lack of demand ex-India right now. The effect of red sea is still to be determined in more tangible terms in the Indian market.” An exporter of containerised freight from India told Container xChange. 

Another customer of Container xChange, a containerised freight exporter from India said, “Ocean freight costs across the ISC region is increasing drastically. Also, there is enough supply of containers in the region and there is no shortage of SOCs (Shippers owned containers) observed so far due to the Red Sea situation in this region. In the coming days, equipment shortages from main liners will start to reflect in market. All the big liners like the CMA CGM, MSC, Maersk and Hapag Lloyd have suspended operations through the Red Sea and hence, this will impact the SOC market positively. The pickup charges for shipper owned containers will start to increase in the coming weeks.

While the effects in India have not yet prominently surfaced, the impact of the Red Sea situation is rather glaring in China. 

“The current situation in the container industry reflects a highly competitive and rapidly evolving market. Container factories are operating at full capacity until March, with a surge in demand indicating the intensity of the current situation. The preference for brand new units highlights the market’s anticipation of a prolonged scenario. The heightened demand has led to increased costs across leasing and trading, as suppliers seek quick returns by selling out their units. This has a cascading effect, with leasing suppliers adjusting prices due to rising trading costs, resulting in an overall inflation of prices.”

“The scarcity of units, particularly in the China to Russia and Europe routes, has intensified, leading to exorbitant prices. For instance, some suppliers are quoting $1600 USD for Ningbo to Moscow and over $1300 USD for China to Poland. While the US market has felt the impact, it’s not as pronounced.”

“Intriguingly, entities focused on trading and supplying, such as local depots and trading companies, are strategically limiting sales quantities to 10 units per buyer. This approach stems from the belief that there is room for further price increases. Additionally, these depots face challenges in renewing their stock, as they are unable to obtain CW units from shipping lines. Consequently, stock levels are constrained.”

“The current landscape has also given rise to opportunistic sellers aiming to capitalize on the situation. Notably, sellers are prioritizing profits over traditional cost calculations, leading to uniform pricing in different locations. For instance, 40HC cargo-worthy unit prices remain same in Shanghai and Ningbo, deviating from the norm where Ningbo typically commands a higher price due to lower unit releases by shipping lines. Sellers are presently driven more by profit considerations than a comprehensive cost-benefit analysis, to benefit from the disruption.” Added the customer from China. 

Market Sentiment Shift: Container Price Sentiment Index (xCPSI) Analysis 

The Container Price Sentiment Index (xCPSI) serves as a valuable metric for assessing the prevailing market sentiments among supply chain professionals on the anticipated trajectory of container prices in the upcoming weeks. In the first quarter of 2023, the index values were in the range of -6 to -11, indicating a prevailing sentiment that the majority expected a decline in container prices during that period.

However, the landscape has witnessed a remarkable shift if compared on a year on year, month on month basis. As of January, the xCPSI values have surged to historic highs, ranging between 67-71. This substantial increase signifies a complete reversal in sentiment, with the majority of supply chain professionals now anticipating a notable upswing in container prices.

The scale values were fluctuating within the moderate range of 25-40 in the month of December, on a 100-point scale. 

Chart 2: Container Price Sentiment Index (xCPSI) by Container xChange

This significant escalation in market expectations regarding an imminent increase in container prices is a clear indicator of the industry’s perception of how the Red Sea crisis is poised to impact container pricing dynamics in the foreseeable future. The heightened values on the xCPSI underscore a shared anticipation among supply chain professionals that the unfolding events in the Red Sea will likely exert upward pressure on container prices in the coming weeks.

 Industry’s Way Forward: Overcapacity, Ever Given Comparison, and Potential Challenges

“The freight rates are tripled since roughly a month ago, and the container prices are also expected to rise further in the short to midterm. The anticipated impact is significant.” Added Roeloffs. 

“However, it’s crucial to remember that our supply chains currently hold a surplus capacity of over 6 million TEUs, accumulated over the last two years due to a demand deficit. This excess capacity acts as a vital cushion to absorb potential shockwaves in the supply chain.”

“The degree of impact hinges on the duration of the Red Sea crisis. Should it persist for an extended period, and the excess capacity continues to be absorbed, we could potentially face serious challenges. Drawing a comparison to the Ever Given situation, where disruption occurred during a period of extreme difficulty in securing capacity and historic peak demand, rates skyrocketed to 10 times pre-pandemic levels. While we aren’t currently at those historic highs, the recent rate surge is noticeable when viewed in the short term.” 

The ongoing attacks by Houthi rebels, utilizing advanced weaponry is disrupting vital shipping routes, compelling shipping companies to reassess their operational strategies. The increased risk of hijackings and attacks not only endangers the safety of vessels and their crews but also triggers a domino effect on trade, leading to rerouting, heightened insurance costs, and delays.

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Rising Spot Rates and Container Demand Surge in the Wake of Red Sea Turmoil, ahead of the Chinese New Year

The Red Sea, a vital conduit for East-West trade, is undergoing unprecedented turmoil due to persistent attacks by Houthi rebels, causing significant uptick in fuel and insurance costs, longer voyages and capacity soak up for the transportation and logistics sector. 

Container xChange, an online container logistics platform for container trading and container leasing, issues a critical advisory as the Red Sea crisis deepens, impacting the landscape of global maritime trade.

Recent attacks by Houthi rebels have persisted on the Red Sea, with the most substantial assault launched on January 9, 2024, indicating a continued threat to maritime traffic in the Red Sea. 

Customers of the Container xChange platform affirm that the shipping lines have raised their slot prices significantly. A Container xChange customer based and operating in Singapore shared on the Red Sea matter that, “Average rate on China-Europe quoted this week is about US$5400/40’HC, up from US$1,500 (3X) just the week before.” 

Container trading spot rates shoot up by 48% in Latin America East in the last 30 days (as on 11 January 2024)

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Chart 1: Region-wise container spot rates 30 days delta as on January 12, 2024

Latin America (East and West), Japan & Korea and Europe Mediterranean witness highest increase in Container trading spot rates over the last 30 days.

“We foresee that the rate hikes will flatten out in the mid to long term. We have enough capacity which can be soaked up in longer transit times and yet not cause permanent capacity crunch.” said Roeloffs. 

Demand for Containers shoot up

There is a growing demand for containers in Asia as shippers and forwarders foresee cargo demand in the coming weeks, to fulfil orders ahead of the Chinese New Year. A container manufacturer from China shared with Container xChange, “Shipping companies are demanding more containers now as they avoid red sea. Therefore, Shipping companies and leasing companies have placed more than 750,000 TEU ISO container orders out of China in the last two months.”

Meanwhile, container trading spot rates are increasing at a staggering rate as observed on the Container xChange platform. Spot rates in Shanghai, Hamburg, Boston, in the illustrations below, indicate examples of the steep demand increase that is currently being witnessed for boxes in these hotspots. 

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Chart 2: Average container market price for trading in Shanghai
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Chart 3: Average container market price for trading in Boston

 

Chart 4: Average container market price for trading in Hamburg

As an immediate reaction to the disruption, these average container spot rates and prices are expected to rise, but then plateau after reaching a high. 

The container price sentiment Index (xCPSI), a sentiment tool by Container xChange to measure market sentiment for container price development, reached an all-time high as container price anticipation peaks. This indicates that the supply chain professionals are expecting these prices to further shoot up in the coming weeks significantly. 

Chart 5: Container Price Sentiment Index xCPSI 2023-24, xCPSI measures container price sentiment index concurrently amongst the supply chain professionals

The index value peaked at 71 in January from an average of 27 in December, mirroring the significant impact Red Sea attacks have had on prices so far. 

The Ultimate Cost Burden 

The two visible and obvious cost components that are leading to higher transport costs resulting from rerouting to Cape of Good hope are – insurance and fuel costs. 

Insurance for cargo transiting Red Sea has become challenging. On top of it, insurance costs have surged in anticipation of the difficulties and challenges that do not seem to taper off.

Another element is the fuel cost which has increased roughly by 20-23% by way of traveling through the Cape of Good Hope, as compared to the traditional Suez Canal route. 

“Ultimately, the final consumer pays the freight cost. In the short term, usually there is some intermediary that pays the bills, because they have promised at some certain price, but ultimately in normal circumstances, the price per unit is adjusted marginally to the end consumer when such a disruption occurs.” added Roeloffs.

Fine-tuning Inventory management strategies 

“There is always safety stock, that retailers keep, so buffer stock is there. Yes, it soaks up some capacity, but this event doesn’t have the capacity to impact inventory to an extent that we do not see products on the shelves. I don’t see that coming.” added Roeloffs. 

 The shipping and the global trade largely have become relatively more resilient to supply chain shocks as these become evidently more frequent and persistent. 

“As we witness continued disruptions disturbing the global supply chains in the mid to long term, we will see enhanced supply chain resilience.” added Roeloffs. 

The bulk, oil and gas sector have no impact so far whatsoever as the vessels carrying these continue to operate on the Red Sea. There has been no attack on these vessel types. High value container vessels are being diverted, impacting the big east-west trade from Europe to Asia and vice versa. 

So far, Out of 700, some 500 vessels have been diverted soaking up significant capacity from the existing overcapacity that the industry was grappling with. 

As businesses face this new challenge, there are three immediate recommendations that can improve the situation handling currently for companies-

  • Hold Adequate Safety Stocks: Maintaining sufficient safety stocks is crucial for absorbing disruptions without significantly impacting inventory levels.
  • Enhance Flexibility: Operating with multiple networks and suppliers adds resilience, reducing dependency on a single source.
  • Leverage Technology: Embracing technology is paramount for identifying problems in (or almost) real-time and making informed decisions, ensuring a proactive response to disruptions.

 Note of context:

In a troubling turn of events, the Red Sea, a vital artery for global maritime trade, is facing unprecedented disruptions, primarily due to recent attacks by Houthi rebels on ships passing through the region. The Red Sea, with its strategic importance accentuated by the Suez Canal, serves as a crucial superhighway connecting Europe, Asia, and Africa. Recent attacks have escalated operational costs, creating significant challenges for shipping industries and placing downward pressure on profits. The Bab el Mandeb strait, also known as the Gate of Grief, has become a focal point, and its geographical challenges make it a critical chokepoint for maritime traffic. The disruption is not only impacting the flow of goods but also leading to a substantial re-routing of vessels, resulting in increased shipping costs, longer voyages, and environmental concerns.

Impact Highlights:

  • Rerouting Challenges: Vessels are diverting around the Cape of Good Hope, leading to increased fuel costs, environmental concerns, and impacts on shipping efficiency.
  • Shipping Industry Strain: Shipping costs have surged, with a 60 percent drop in vessels passing through the Suez Canal.
  • Oil Tanker Stability: Despite disruptions, oil and fuel tanker traffic in the Red Sea remained stable in December, providing a glimmer of hope for stable energy supply chains.
  • Rising Shipping Costs: The Red Sea crisis is projected to push shipping costs up to 60 percent, coupled with a 20 percent increase in insurance premiums, affecting overall operating costs. 
  • Insurance Challenges: War risk premiums for shipping have surged, impacting transportation costs and potentially leading vessels to seek alternative routes.
  • Re-routing Impact: Re-routing through the Cape of Good Hope results in 10-20 days of delays, adding complexity to logistics and affecting delivery timelines.
  • Supply Chain Disruptions: The Red Sea crisis spotlights broader issues of supply chain disruptions, requiring strategic planning and forecasting by companies to navigate challenges.

As the Red Sea crisis unfolds, the global shipping industry faces unprecedented challenges, necessitating collaborative efforts and strategic solutions to ensure the resilience of supply chains and mitigate the far-reaching impacts on international trade.

 

shipping trade

Global Trade Braces for Unprecedented Geopolitical Challenges in 2024 

Container xChange, a leading online container trading and leasing platform, releases its New Year’s Edition Container Market Forecaster, shedding light on the escalating geopolitical risks set to reshape the landscape of global trade in 2024.

In response to these geopolitical risks, majority of shipping professionals surveyed in the month of December 2023, by Container xChange, are gearing up to enhance resilience through strategic initiatives like – ‘risk assessment and scenario planning’, ‘diversification of routes’ and ‘suppliers and regulatory compliance’. The biggest ‘headache’ resulting from geopolitical upheaval is the ‘associated costs’ that they will have to bear on top of the rising operating costs that they have to already face. 

Key Highlights:

  1. Strategic Focus Areas: In response to geopolitical risks, shipping professionals are prioritizing ‘risk assessment and scenario planning,’ ‘diversification of routes and suppliers,’ and ‘regulatory compliance’ in 2024.
  2. Rising Concerns: Survey findings reveal that the biggest concern stemming from geopolitical upheaval is the ‘associated costs,’ compounding the challenges posed by soaring operating costs. Many customers are worried about the rising costs resulting from the Red Sea situation like compliance charges, insurance premiums and war risk charges, etc. The operating costs have already been rising soon after the rates crashed in 2022, and demand failed to recover. On top of the rising costs, these additional surcharges will only add to the worries of shippers and forwarders.
  3. BRICS Expansion: The inclusion of new economies in the BRICS bloc, including Saudi, Iran, UAE, Egypt, and Ethiopia, sets the stage for potential polarization of global trade, impacting geopolitical compliance.
  4. Technology Utilization: Despite challenges, 82% of industry professionals acknowledge the importance of technology for resilience in 2024, with predictive analysis and forecasting tools taking center stage.
  5. Sanctions Compliance: Amidst geopolitical developments, sanctions compliance becomes critical for supply chain professionals, adding another layer of complexity to global trade.
  6. Fluctuating Freight Rates: freight rates will increase in the short to midterm, but not in the long run as demand and supply is still highly imbalanced with no clear signs of a strong revival. 

Talking about the Red Sea situation, Christian Roeloffs said, “The Red Sea is a vital artery for global trade which is currently blocked. Thankfully, there are ways to circumvent that artery and keep the global trade moving and therefore, the trade is not stopped. Therefore, the red sea situation is acute but not chronic in the long term for the shipping industry.

There are still many geopolitical risks that have the potential to significantly impact shipping trade in 2024. We have the Israel – Hamas war, the related situation in the Red Sea, the Russia Ukraine war with no end in sight, tensions between China and Taiwan and an increasing enlargement of the BRICS block. 

BRICS expansion

“What can have a far- reaching and long-term impact on the global supply chain is the BRICS inclusions of more economies.” Roeloffs added. 

There is a host of countries being added in the BRICS block, namely, Saudi, Iran, UAE, Egypt, Ethiopia, while Argentina declined inclusion. BRICS has been viewed as a counterbalance to the Western-led world order. 

“If the block starts to increasingly align political decisions and geopolitical stances, then there could be added complexities to the global trade order with rising polarization of global trade. Ultimately this might lead to a situation where one block is not allowed to trade with the other block and eventually, geopolitical compliance becomes more complex and difficult.” he added. 

The expansion of BRICS will bring further interesting developments worth noting. Iran and Saudi are now in the same organization despite a strained relationship. Egypt has close commercial ties with Russia and India but also with the US. India and China together account for ~2.5bn people and could heavily influence global policymaking if they are more aligned.  And finally, Russia and Iran being able to jointly influence “trade” policymaking within the BRICS group could lead to a “sharpening” of trade rethink of US-allies vs BRICS.

Amidst these developments, sanctions compliance will become critical for supply chain professionals for doing business. 

Any geopolitical unrest has a direct and causal impact on global trade which results in market volatility. Classic case in point is the Gaza Strip and the resulting actions by Houthis in Jemen. This leads to trade rerouting, ultimately resulting in rising operating costs, delays, and service disruptions.” said Roeloffs.

shipping trade

Navigating the Red Sea Crisis: S-RM’s Gabrielle Reid Advocates Adaptive Shipping Strategies

As Houthi rebels continue to pose a threat to shipping routes in the Red Sea, global supply chains are experiencing disruptions, compelling half of all fleets to avoid this critical passage. This dilemma prompts shipping companies to consider alternative strategies, such as circumventing Africa’s Cape of Good Hope, despite its increased time and cost implications.

Gabrielle Reid, an Associate Director in the Strategic Intelligence practice of S-RM, a global corporate intelligence and cybersecurity consultancy, shares valuable insights into the Red Sea crisis and advises shippers on contingency plans. Her recommendations include rerouting options, adherence to best management practices, enhanced security protocols, and preparedness measures for potential confrontations with Houthi rebels.

Reid emphasizes the importance of adaptability in mitigating the impact on customers and maintaining global supply chain continuity. Shipping companies are implementing various measures, including optimizing other parts of the logistics chain and proactive communication with customers. However, Reid underscores the dynamic nature of global logistics, warning of potential consequences such as increased freight rates, longer lead times, and disruptions to supply chains, even with available excess capacity.

In terms of affected commodities, Reid notes that rising ocean freight rates will impact goods relying on the Red Sea corridor. Container shipping is expected to experience the largest rate increases, followed by bulk carriers and tankers.

Re-routing through the Cape of Good Hope, while a viable alternative, comes with significant challenges. The longer route, up to 10 days, results in delays, higher fuel consumption, and additional operating costs. Estimates suggest a one-third increase in transit costs from Asia to Europe, with shipping rates rising by 10 to 20 percent in recent days. Reid points out that shipping companies may need to absorb these increased costs or pass them on to consumers, potentially influencing commodity prices and causing ripples in global markets.

The article highlights the critical need for shipping companies to embrace adaptability and develop robust contingency plans to navigate the complexities of the Red Sea crisis, ensuring the resilience of global supply chains in the face of dynamic geopolitical challenges.