CRITICAL BRIEFING: RED SEA & SUEZ CANAL DISRUPTIONS ON GLOBAL SHIPPING

Update Week 22 - 2024

We are seeing significant increases on Asia SB trade and in particular into Australia.  We’ve had 4 successful GRIs since March, with June GRI announced by ANL, COSCO and OOCL.

From China to Australia the GRI announced was at USD300/TEU although the rates are coming through with a slightly lower increase of between USD150 to USD200 per TEU.

Space from South East Asia to Australia is also under pressure and we again starting to see congestion at the transship hubs, such as Singapore.  COSCO has warned that berthing windows in Singapore are starting to blow out to about 5 to 7 days, this will no doubt cause delays with cargo transiting through Singapore. 

For New Zealand the market has been relatively softer, although recent disruptions to schedule have created reduction in capacity with some sailings being overbooked, but we are not seeing the same level of cargo rollover as for Australia. 

South East Asia to New Zealand services have been relatively soft with no reported issues on space.  The rates have also remained at a stable level, although as congestion in Singapore increases, no doubt this will have an impact on NZ with possible sailing delays.

There is pressure to increase rates into New Zealand to mitigate the gap between AU and NZ market rates, with carriers claiming continuity of services and excess to equipment supply.

There are other long haul markets, such as Trans Pacific, who are paying in access of USD5000 per FEU which means that these higher paying markets will get priority on equipment availability as well as any spare ships being diverted to these trade lanes. 

This means that we are unlikely to see any increases in capacity for Oceania this year and the likelihood of extra loaders during the peak season is slim.

Equipment is going to continue to be a problem, especially for ANL across all China and SEA ports, with other carriers beginning to struggle with equipment supply.

Below is an update on the Red Sea Contingency/Emergency surcharges:

Update Week 5 - 2024

As we approach the Chinese New Year, we anticipate further disruptions, including a tightening of container availability and vessel space. However, the holiday season also provides a valuable window for carriers to recalibrate their networks. As a result, we expect freight rates and container prices to drop again early in the new Chinese year.

The impact of the Red Sea crisis, while more immediate, is not expected to be as prolonged as the pandemic – and shippers are becoming increasingly impatient and suspicious of carriers seeking to keep rates elevated for as long as possible, essentially in Short term. We are seeing some decline in the pricing since the last few days, as Carriers are getting habitual with re-routing , while capacity is not low, effective capacity is impacted, essentially meaning returning vessels are delayed.

What we are seeing with lot of vessels returning back in FEB, the ST rate will be depressed, Drewry WCI dropped 4%, but demand hasn’t seen a significant uptick. Once the laden vessels depart towards mid- end of FEB back to EU/US, the rate may climb again, as minimum quantity commitments (MQCs) are not being honoured under existing contract agreements, with carriers pushing them onto the freight of all kinds (FAK) market - meaning higher rates. The forecast is we are going to witness an average ST uptick rate structure for H1 2024.

The average monthly container leasing rate from Shanghai to Le Havre jumped 323% in January compared with December. During the same period, transpacific rates increased anywhere from 31% to 52%, while Shanghai-to-Montreal was up 27%. The Red Sea crisis affects an estimated 30% of the world’s container fleet. That represents a lot of ships being rerouted around the Cape of Good Hope, which increases each ship’s sailing distance by around 30%. We also believe, based on the heavily oversupplied market following the ordering rush that we saw during the pandemic and the slowing down of demand afterwards, that there is ample room to recover from disruptions such as this.

Even minor delays can trigger a domino effect on production schedules. The global supply chain operates on a "just in time" basis, where each component arrives precisely when it's needed for the production line. Any disruption affects every stage of the manufacturing process, leading to widespread delays.

Even if the Red Sea disruption is here to stay for some more time, any port efficiency erosion will be short-lived because shipping demand is far weaker today than it was during the pandemic, and Red Sea diversions will soon be incorporated in ocean carriers’ longer-term planning, as we can see by the spot rates trending downwards.

Top Trade Lanes Affected

• Ex Far East to Western/Northern Europe
  
• Ex Far East to Med
• TransPacific West Coast
• TransPacific East Coast
• Indirect impact on all lanes
  

Domino effects on rates, space & equipment

• Longer transit times = less capacity & higher freight cost + higher bunker
  
• Equipment turnaround/repositioning also takes longer
• Compounded by upcoming CNY
• Expect carriers to prioritise long haul routes on space & equipment
• Higher insurance cost

Want to mitigate these challenges?

Update Week 4 - 2024

The evolving situation in the Red Sea is complex, with potential implications that span the entire maritime supply chain. It is crucial to stay vigilant, monitor developments closely, and be prepared to adapt operations in response to this dynamic situation.

Some points to take into account:

1. Increased Security Concerns. The instability in the region could lead to increased security concerns for ships traversing the Red Sea. This may require additional security measures, such as armed guards or enhanced screening of cargo, which could add to the cost of doing business.
2. Delays and Interruptions. Any political or military conflict in the region could lead to delays or even blockades of the Red Sea, disrupting the flow of goods. This could cause significant disruptions to global supply chains, as the Red Sea is a key shipping route connecting Asia, Europe, and the Americas.
3. Rising Insurance Costs. The risk of piracy or other attacks in the region could lead to higher insurance costs for ships operating in the area. This could translate into higher costs for shippers and freight rates – especially if uninsured.
4. Shift in Trade Routes. If the situation in the Red Sea persists, shippers may look for alternative trade routes to bypass the region, leading to changes in global trade patterns. This could affect ports and shipping companies that have relied on the Red Sea for revenue. This can, however, be an opportunity to explore alternative multimodal solutions.
5. Changes to services and rotations. Most carriers are reviewing their services and port calls to mitigate transit delays caused by diversion via Cape of Good Hope.

There are several effects on flow to the overall shipping situation, as well as various impacts on Asia / Oceania.

1. Space – space across the board is under pressure, with shifting buying patterns and market volatility, there is still a significant pressure on space across all Oceania bound services.  Compounding factors such as industrial action at DPW and the forthcoming Chinese New Year is seeing volumes increase and capacity reduce with a number of blank sailings and schedule disruption.
2. Backlog Clearing – several spare ships have been sent to the Europe trade lane to clear their backlog, with some carriers losing ships across other routes and limiting the number of extra loaders to clear the backlog affecting Oceania.
3. Huge pressure on equipment supply – Europe to Asia is a major empty container repossession route, thus all empty containers are being delayed by 3 to 4 weeks. 
   • No equipment = no bookings = missing allocations = rollovers to the next week = bottle neck
4. Congestion at transship ports – SIN/PKG is still severely congested and expected to get worse as EU ships that have been delayed start arriving.  We’ve seen a number of carriers putting a stop on fresh bookings for a number of weeks to clear the backlog and mitigate a bottleneck.
5. Rates are rising across the board – even though we are coming into a traditional slack season for our region we are still seeing rate increases in Asia to Oceania tradelanes.  This is again driven by market volatility and political uncertainty, high demand and upcoming Chinese New Year.
6. Volatile market – This leads to a reduced forecasting ability.  We are coming into the traditional slack season, but the trend is going in the opposite direction.

Further short-term pressure is present in the market as Chinese New Year approaches and forwarders and shippers are working hard to get shipments out before Chinese manufacturers close down for the week of February 10. Disruption from the Red Sea will lead to retailers drawing on their buffer stocks to keep shelves full in stores with the aim of not reaching the critical state of empty shelves and product shortages.

What is going on?

Since November 19, there have been multiple hostile attacks and hijacking attempts occurring in the Southern Red Sea in an area called Bab el Mandeb, a strait between Yemen on the Arabian Peninsula, Djibouti, and Eritrea in the Horn of Africa. The attacks have been claimed by the Houthis in Yemen and are the fall out of the current conflict in Gaza.

About 17,000 ships and 10% of global trade pass through the Bab al-Mandab strait every year, and it will have severe impact on global trade.

The Suez Canal is a crucial lane for global shipping, with 19,000 vessels a year on average, contributing to about 30% of global container traffic and more than a million barrels of crude oil per day.

The Suez Canal Authority in Egypt is closely monitoring these tensions, given the canal's critical role in global trade. The canal connects the Mediterranean to the Red Sea and is a key route for shipping between Europe and Asia.

The International Chamber of Shipping has also called for states with influence in the region to work to stop the actions of the Houthis in attacking seafarers and merchant ships and de-escalate the serious threat to international trade.

Incident Recap

• First missile launched from Yemen on 19-Oct-23 against Israel
  
• First attack against merchant shipping on 19-Nov-23: Pirate boarding attack against Galaxy Leader
• First drone strike on 24-Nov-23 against CMA CGM Symi
• First missile strike against Unity Explorer on 03-Dec-23
• By mid-December: all major carriers announce change of transit via the Cape of Good Hope (MSK briefly backtracked before re-confirming its decision to transit via the Cape)
• US-led military operation began on 18-Dec-23. Still ongoing
• Until 02-Feb-24 – 30 attacks on commercial shipping with 13 suffering direct hits, but only causing minor damage
• There is no telling when this will end, but even if things were to suddenly go back to normal, it’ll still take a few months to adjust.
• Some ships are also going through the Panama canal to reach Europe/Med, exacerbating the back log in the canal. A back log caused by drought and climate change.
• First time we see both major canals disrupted.

How does this affect global trade?

Due to the recent attacks on commercial vessels in the Red Sea, a number of shipping lines are changing their service plans, effectively pausing their routing via this region.

Maersk, Hapag Lloyd and CMA recently asked their westbound fleet in route to the Suez Canal crossing to pause or halt outside of the Bab Al-Mandab Strait. MSC has opted to redirect some of its services around the Cape of Good Hope, located at the southern tip of Africa. The expectation is that more such decisions will be taken by other carriers.

All vessels that were due to transit Bab el Mandeb over the weekend have been asked to drift and not transit, and schedules are being updated. Since November 19, 55 ships have rerouted via the Cape of Good Hope, with other vessels waiting for further instructions. This will lead to an increase in transit by over 8-10 days for Asia to Europe cargo and result in bunching of vessels.

These decisions being made by carriers are being carefully considered and are being implemented to ensure the safety of the vessels, the crew and ultimately your cargo.

In response to these threats, some oil tanker owners are introducing new clauses in their shipping contracts to include an option to reroute via the Cape of Good Hope as a precautionary measure. This decision reflects the heightened concern for safety and the need for flexibility in navigating these volatile conditions.

How does this affect me?

While enhancing the safety of the vessels and their cargo, these actions add significant transit time to the voyages. Typically, shipping from Shanghai to Rotterdam takes about 27 days via the Suez Canal, but rerouting adds at least 7 days to these transit times.

These actions are expected to increase freight rates for Asia – North Europe and Mediterranean trade lanes, due to the longer voyages.

This potential rate increase, however, is not expected to reach the levels experienced during the COVID-19 pandemic, as this time carriers have excess capacity to address the disruption.

How can we mitigate the impact?

Stay informed. Kerry Logistics is working closely with all our carriers to confirm their intended plans, and we will be in touch with a further update as soon as possible. In the meantime, we will monitor all your shipments on those services affected and confirm revised arrival dates as soon as they are available. We offer customers a comprehensive range of solutions & services to help mitigate the impact & keep your supply chain running as smoothly as before.

As this situation is developing, we are working towards making arrangements for additional SPOT/Premium space on a First Come, First Served basis, as well as securing forecasts with existing customers to plan for Q1 2024 demand.

As your reliable logistics partner, we are monitoring the situation closely and are ready to provide solutions to mitigate and decrease the impact on your supply chain. We can help navigate these challenges & minimise disruption in several ways:

2.Capacity management: We closely monitor available space, co-ordinate with carriers & act proactively with timely updates.

3.Efficient equipment utilisation: We closely monitor container inventory, prioritise customer’s cargo & minimise turnaround times.

4.Freight rate negotiation: Our close relationship with carriers enables us to have an edge on pricing despite the crisis.

5.Supply Chain visibility: We offer full visibility allowing for timely adjustment & proactive risk management.

6.Consultation and advisory service: Timely & relevant information, helping customers to navigate the crisis.

If you would like to discuss your particular case, we invite you to reach out:

IFCBAA Strategic Briefing

The International Forwarders & Customs Brokers Association of Australia (IFCBAA) has issued a press release (Dec 20, 2023) with a strategic briefing regarding the situation - specific for Oceania. You can read the full press release here.

The security dynamics in the Red Sea region have worsened due to increased hostilities from Houthi insurgents backed by Iran, resulting in substantial interruptions to maritime traffic and a consequent rise in global energy costs. In response, a collaboration comprising the United States, European nations, Bahrain, and Canada has launched Operation Prosperity Guardian. The U.S. has already dispatched naval forces to the Gulf of Aden as part of this initiative. It seeks to establish an international coalition to safeguard commercial ships from the Houthi threat. While implementing protective strategies such as naval escorts may introduce operational delays, the exact framework and extent of the task force's responsibilities are currently under development.

Key Trade Impacts:

• Diversion: all major shipping lines have suspended Red Sea transits and rerouted voyages around Africa.
• Transit Time: additional 10-14 days for Asia-Europe journeys, impacting pre-Chinese New Year shipments.
• Cost Increases: Rerouting adds $3.4M per Asia-Europe round voyage due to fuel and charter expenses, leading to potential freight rate hikes.
• Container Shortage: Rerouted vessels delay empty container return to Asia, potentially impacting Australian exports.
• Shipping Rates Impact: Despite only 12% of capacity being blanked in January, rates are expected to remain high due to the ongoing Red Sea disruption.
• Strategic Impact on Oceania: The diversion of vessels around Africa will absorb the excess vessel capacity, slightly increasing rates in other trades. Diverting vessels from blank sailings to meet the new European schedule requirements may reduce Asia-Oceania trade capacity in the medium term.

Summary of Major Shipping Lines diversion plans:

We will continue monitoring the situation and will advise any critical events. In the meanwhile, we suggest to stay informed to mitigate the impact and get in touch with us to evaluate solutions.