Red Sea attacks send freight rates through the roof

The Red Sea has become a focal point of concern for international trade. The ongoing attacks by Houthi rebels are disrupting vital shipping routes, compelling shipping companies to reassess their operational strategies.

The increased risk of hijackings and attacks is not only endangering the safety of vessels and their crews but is also triggering a domino effect on trade, leading to rerouting, heightened insurance costs, and delays.

“The Houthi attacks continue unabated. Fortunately, the military presence in the region, led by the Americans and the United Kingdom, has proven effective in preventing the missiles and drones from reaching their intended targets,” notes Christian Roeloffs, CEO of Container xChange.

All the big liners – like the CMA CGM, MSC, Maersk, and Hapag Lloyd – have suspended operations through the Red Sea. “This is a nightmare situation for shippers and exporters as freight rates, container prices, and insurance costs have escalated. The impact has been a significant deterrent for container vessels since last month: 70 to 80% of container traffic has been rerouted, especially the larger carriers,” Roeloffs adds.

Pre and Post-Chinese New Year Implications

As Chinese New Year approaches amid ongoing disruptions in the Red Sea, Roeloffs predicts a tightening of container and vessel availability.  “The rerouting via the Cape of Good Hope adds complexity to the situation. We expect freight rates to remain elevated, and supply chain managers will need to navigate ongoing schedule disruptions.

“Looking beyond Chinese New Year, we project blank sailings and capacity reduction by carriers. The industry is witnessing a focused effort on resetting networks, leading to tightening of container availability and vessel space,” he says. “While high freight rates and increased costs pose midterm challenges, our analysis indicates that these disruptions are not likely to be long-term. Rate reductions are anticipated on the horizon due to the structural overcapacity resulting from a severe market imbalance.”

Global Impact: European Delays

The Port of Eilat, Israel’s toehold on the Red Sea, has seen an 85% drop in shipping activity, its chief executive told Reuters last month.

The impact of disruptions in the Red Sea is reverberating through Europe, causing delays in shipments. Nevertheless, the persistent supply-demand imbalance has provided a cushion to the shockwaves so far and the rates have not skyrocketed yet to post-Covid levels.

Industry’s Way Forward

Roeloffs reveals that freight rates have tripled since roughly a month ago. Container prices are also expected to rise further in the short- to mid-term. The anticipated impact is significant. However, it’s crucial to remember that our supply chains currently hold a surplus capacity of over six million twenty-foot equivalent units (TEUs), accumulated over the last two years due to a demand deficit. This excess capacity acts as a vital cushion to absorb potential shockwaves in the supply chain.

“The degree of impact hinges on the duration of the Red Sea crisis. Should it persist for an extended period and the excess capacity continues to be absorbed, we could potentially face serious challenges. Drawing a comparison to the Ever Given situation, where disruption occurred during a period of extreme difficulty in securing capacity and historic peak demand, rates skyrocketed to 10 times pre-pandemic levels. While we aren’t currently at those historic highs, the recent rate surge is noticeable when viewed in the short term,” he concludes.