Daily Management Review

Concerns About Protracted Disruption In The Red Sea And Inflation Cause Container Rates To Surge


Concerns About Protracted Disruption In The Red Sea And Inflation Cause Container Rates To Surge
Container shipping costs have surged this week for important global trade routes, industry executives said on Friday. The strikes by the United States and the United Kingdom on Yemen have sparked concerns about a protracted disruption to global trade in the Red Sea, one of the busiest routes in the world.
Numerous raids were carried out across Yemen overnight by American and British warplanes, ships, and submarines in retaliation for attacks on Red Sea shipping by Houthi forces backed by Iran. This increased regional violence arising from Israel's war in Gaza.
Twelve percent of world traffic passes through the adjacent Suez Canal, which most container ships were already avoiding. The canal connects Asia and Europe. The militaries of the US and the UK have now urged all ships to avoid the combat area.
This increased concerns about the possibility of a fresh wave of worldwide inflation due to the potential increase in prices for bulk carriers and oil tankers, which transport essential goods.
On Friday, the benchmark Shanghai Containerised Freight Index reached 2,206 points, up more than 16% from the previous week. The index, which measures non-contract "spot" pricing for container shipments out of China's ports, has increased 114% since mid-December.
According to prominent ship broker Clarksons, prices for containers heading to the unaffected U.S. West Coast surged 43.2% to $3,974 per 40-foot container this week, while rates on the Shanghai-Europe route increased 8.1% to $3,103 per 20-foot container on Friday from a week earlier.
"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.
Leading companies in the ocean transportation sector, which manages more than 90% of world trade, are preparing for months of inflation-inducing turmoil.
"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.
Prominent owners of container ships, like Maersk and Hapag-Lloyd, have shifted ships headed for the Suez Canal to the lengthier path that circumnavigates Africa's Cape of Good Hope. This has caused delays to spiral out of control for intricate vessel scheduling. On the most afflicted routes, rates have at least doubled from a month ago, but they are still lower than the pandemic's record highs.
On Friday, five oil tankers either diverted or stopped their journey, and four of them circled back to avoid the Red Sea.
"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.
Prominent importers such as Ikea, Tesla, and Volvo Cars, controlled by Geely, have already issued alerts about product shortages or delayed delivery.
Every one-way trip from Asia to Europe requires an additional 10 days and $1 million in fuel, if a ship is rerouted around Africa.
In order to make up for this, carriers are bringing their ships into the most impacted trade channels in Europe and the Mediterranean. As a result, there is less vessel space available for goods travelling on North-South and Transpacific routes, which raises sending rates, according to a note from Omar Nokta, an analyst at Jefferies, on Friday.
Additionally, vessel operators are restricting less expensive, contract-rate space and implementing surcharges relating to the Red Sea, which forces certain clients' shipments into the more expensive 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.