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Container rates soar on concerns of prolonged Red Sea disruption, inflation

By News Desk
January 14, 2024

LONDON/LOS ANGELES: Container shipping rates for key global trade routes have soared this week, with U.S. and UK air strikes on Yemen stirring fears of a prolonged disruption to global trade in Red Sea, one of the world's busiest routes, industry officials said.

A ship carrying cargo shipping containers sails in the Pacific Ocean outside the Port of Los Angeles in Los Angeles, California on June 7, 2023.—AFP
A ship carrying cargo shipping containers sails in the Pacific Ocean outside the Port of Los Angeles in Los Angeles, California on June 7, 2023.—AFP

U.S. and British warplanes, ships and submarines launched dozens of strikes across Yemen overnight, retaliating against Iran-backed Houthi forces for attacks on Red Sea shipping, widening regional conflict stemming from Israel's war in Gaza.

Most container ships already were avoiding the nearby Suez Canal, a shortcut between Asia and Europe that handles 12 percent of global trade. Now, U.S. and UK militaries have advised all ships to steer clear of the conflict zone. That stoked fears that rates for oil tankers and bulk carriers that ferry vital commodities could surge, raising the risk of a new round of global inflation.

The benchmark Shanghai Containerized Freight Index was up over 16 percent week-on-week to 2,206 points on Friday. The index, which measures non-contract "spot" rates for container shipments out of China's ports, has gained 114 percent since mid-December.

Rates on the Shanghai-Europe route rose 8.1 percent to $3,103 per 20-foot container on Friday from a week earlier, while the rate for containers to the unaffected U.S. West Coast soared 43.2 percent to $3,974 per 40-foot containers week on week, leading ship broker Clarksons said on Friday.

"The longer this crisis goes on, the more disruption it will cause to ocean freight shipping across the globe and costs will continue to rise," Peter Sand, chief analyst at freight platform Xeneta, said in Friday.

Major players in the ocean shipping industry that handles upwards of 90 percent of global trade are bracing for months of cost-stoking upheaval.

"Even if from today forward the Bab al-Mandeb Strait was to become safe and secure for transit, we expect it will take a minimum two months before vessels could assume normal rotational patterns," said Michael Aldwell, executive vice president for sea logistics at Kuehne + Nagel.

Major container ship owners such as Maersk and Hapag-Lloyd have switched Suez Canal-bound ships to the longer route around Africa's Cape of Good Hope. That has sent delays cascading through complex vessel schedules. Rates have at least doubled from a month ago on the most affected routes but remain below the pandemic's record highs.

On Friday, four oil tankers turned around mid-voyage to avoid the Red Sea and five others either made diversions or paused navigation.

"Tanker rates will increase and futures are up this morning," said John Kartsonas, managing partner at Breakwave Advisors, who added that dry bulk remains the least affected sector.

Major importers like Tesla, Geely-owned Volvo Car and Ikea already have reported product shortages or warned of late-arriving goods.

Rerouting a ship around Africa adds roughly 10 days and $1 million in fuel costs for each one-way voyage between Asia and Europe.

Carriers are pulling vessels into the most affected European and Mediterranean trade lanes to compensate. That is reducing available vessel space for cargo moving on Transpacific and North-South routes and sending rates higher, Jefferies analyst Omar Nokta said in a note on Friday.

Vessel operators also are rolling out Red Sea-related surcharges and rationing less expensive, contract-rate space - forcing some customers' shipments into the pricier spot market.

"The price of a vast range of goods threatens to march upwards again," said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

Meanwhile, the Panama Canal said it "understands" clients' decisions to turn to alternative shipping methods as the canal, one of the world's busiest trade routes, faces restrictions due to an ongoing drought, and that it was working on solutions to avoid setbacks caused by future climate crises.

On Thursday, Danish shipping giant Moller-Maersk said it would turn to rail to move some cargo, as reduced crossings at the Panama Canal due to low water levels have caused bottlenecks.

"We will continue to support Maersk's operations, as the announced changes affect just one of Maersk's services - OC1 Oceania - while other services will continue to transit the canal," the Panama Canal Authority told Reuters.

The authority added it was developing short- and long-term solutions to limit climate anomalies' impact on the trade route, which moves about 5% of the world's commerce.

"We understand that our customers, like us, need to adapt their operations due to the impacts of climate variations around the world and the current water shortage in the Panama Canal," the authority said.

Maersk's OC1 service, connecting Australia and New Zealand with the U.S. East Coast cities of Philadelphia and Charleston, South Carolina, via the Panama Canal, will now create two separate loops, one Atlantic and one Pacific.

The workaround comes as vessel owners also are rerouting ships to avoid militant attacks that are disrupting the Suez Canal, its longtime rival trade shortcut, in what has become the largest disruption to ocean shipping since the Covid-19 pandemic.

The Panama Canal typically allowed around 36 crossings a day, but due to the low levels of water required to push boats through the passage, the canal authority has gradually lowered that number. It now allows 24 crossings a day.