Global shipping adjusts to Red Sea attacks, impacting freight rates

The container shipping sector is expected to experience the most significant increase in freight rates, followed by bulk carriers. Tankers, many originating from the Middle East, are already benefiting from high rates, so further increases may be limited. Additionally, air cargo rates might rise due to demand for time-sensitive shipments.

The Suez Canal, a critical maritime passage, sees an average of 50 ships daily, including container ships, tankers, and bulk carriers. It is estimated that 25-30 per cent of global container shipping volumes pass through this canal, primarily facilitating trade between Europe and Asia, including Indian and Middle Eastern destinations, as per Fitch.

Major container shippers like Maersk and Hapag Lloyd, along with some oil companies, have announced the rerouting of their vessels. Surcharges for routes to or from the Middle East are being introduced by some shippers for Europe-Asia trade and regional port calls. This rerouting decision has led to a roughly one-third reduction in vessel traffic through the Suez Canal.

Rerouting around Africa can extend travel time from the Far East to Europe by 50 per cent, potentially reducing global container shipping capacity by 10-15 per cent. To mitigate this, container ships might increase speed and reduce port calls. Despite low current levels of idle capacity, Fitch Ratings does not foresee these disruptions significantly impacting the global shipping supply-demand balance in the medium term. In 2024, container shipping capacity supply is expected to exceed demand growth by approximately 4 percentage points.

If the disruptions last more than two quarters, they may influence annual container contract rates for affected routes, but this is considered unlikely. These rates are typically reset in the first half of the year. The importance of Red Sea passage has led to the formation of a US-led military coalition to establish a safe corridor, suggesting that the disruptions might not be prolonged.

The current situation echoes the port congestion issues of 2021-2022, including a six-day blockage of the Suez Canal in 2021, when container freight rates surged up to four times their long-term averages. Unlike the previous congestion episodes, the current rerouting implies higher operating costs and more predictable arrival times. Additionally, the demand for goods in North America and Europe is not as strong as it was during 2020-2022.

Moreover, the disruptions in the Red Sea are compounded by the Panama Canal congestion caused by drought conditions, which have significantly reduced vessel traffic. This affects primarily bulkers carrying agricultural commodities and tankers.

Fibre2Fashion News Desk (DP)