The liner industry is the shipping sector most affected by the Red Sea developments to date.
Either via necessity (crew safety/cargo security) or via opportunity (vessel diversions helped absorb much of the containership overcapacity), liner operators have already rerouted 80% to 90% of the capacity transiting the Red Sea/Suez Canal waterway around the Cape of Good Hope. Tanker shipping is the second shipping sector most affected by the Houthi attacks. Nevertheless, today, tanker Red Sea developments remain a distant second to liner developments: an estimated 20% of the tankers previously transiting the Suez Canal have been diverted, although this number could increase significantly in the coming weeks.
We estimate that the Red Sea diversions greatly increased containership TEU-miles, boosting global TEU-mile demand by about 6.5%: trip distances from Asia to NW Europe increased by 30% to 40%, while distances from Asia to East Mediterranean could surge by 80% to 120%. The Asia-US trade was also impacted. We estimate that 30% of the shipments between Asia and the US East Coast/US Gulf typically follow the Suez Canal route, while 70% of those shipments typically follow the all-water Panama route. Rerouting the Suez traffic via the Cape of Good Hope will add 17% to 22% to the Suez route distances, adding 12-13 days to a round trip.
As a result of these developments, shippers found themselves in a bind as they rushed to secure prompt delivery of their cargo before the Lunar Year celebrations in early February and the resulting two-week shutdown in Chinese factory activity, which typically establishes a temporary curtailment of Asian exports. Liner operators gained the upper hand in freight rate negotiations. By mid-January 2024, liner spot freight rates from Asia to Europe had nearly quadrupled since the start of December of 2023 (which marked the beginning of Houthi attacks on shipping). During the same period, liner spot freight rates from China to the US more than doubles. Furthermore, disruptions led to equipment delivery delays in Asia (empty boxes), thus also impacting rates on other routes, but to a much lesser extent. The logistics/supply chain has been disrupted on a global basis (box distribution), and delays could persist for 2 to 3 months after the Suez Canal passage is fully restored.
Containership charter rates were much tardier than liner freight rates to respond. However, demand for charter vessels to serve as extra loaders in the Mediterranean and in the Arab Gulf has gradually increased. By mid-January 2024, charter rates averaged 10% higher than their end-2023 lows and are likely to gain more ground in the coming weeks.
Looking ahead, it is very difficult to forecast how long the Red Sea disruptions will persist. The first test for liner companies is to see what will happen during the lull in shipping activity following the Chinese Lunar Year in early February. We expect that liner freight rates will moderate in February, but are likely to remain at elevated levels thereafter as we expect the Red Sea turmoil to continue.
We expect the worst of disruptions to last 3 to 5 months, at the very least. Even if the Red Sea traffic were to fully resume, liner freight rates are likely to remain high for an extended period due to equipment imbalances (empty containers) impacting all major routes, and also due to higher wages and high insurance costs for Red Sea shipping. The longer the situation persists, the greater the demand for charter vessels to serve as extra loaders and feederships, and the higher the gains for charter rates will be. However, liner and charter rates should adjust lower again later this year, assuming an end of the Red Sea turmoil.
Implicit assumption in this scenario is that the Middle East crisis eases later this year and that the inflationary impact on the global economy is modest. However, the longer the crisis persists, the more negative the impact on the global economy, especially in Europe (both on European consumers due to increasing inflation, and on leading European economies due to falling exports to Asia).
January 19, 2024
