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February 15, 2024

Updated Red Sea Advisory: Shipping Industry Continues to Grapple with Uncertainty 

Updated Red Sea Advisory: Shipping Industry Continues to Grapple with Uncertainty

The Red Sea crisis has emerged as a significant challenge for global supply chains, affecting shipping routes, operational costs, and international trade dynamics.  

Geopolitical Tensions and Operational Disruptions 

  • Impact on North African Cargo Services: Geopolitical tensions have severely disrupted cargo services between Algeria and Morocco, affecting transshipments through key hubs like Algeciras and Tangiers. Algerian cargo has faced particular difficulties in utilizing Tangiers, complicating logistics operations in the region. 

Surge in Shipping Costs and Surcharges

  • CMA CGM Announces Rate Increases: In direct response to the escalating crisis, CMA CGM has introduced significant rate increases to mitigate the heightened operational costs. 
  • Peak Season Surcharge (PSS) Details: The PSS implemented by CMA CGM for shipments from Oman to Europe and North Africa varies depending on the destination. Rates are set at $1000 USD for a 20’ container and $1500 USD for a 40’ container to North Europe, Western Mediterranean, and North Africa. For East Mediterranean destinations, the surcharge increases to $1500 USD for a 20’ and $2000 USD for a 40’ container. 

Route Diversions and Port Congestion

  • Strategic Avoidance of the Suez Canal: Major carriers including CMA CGM have shifted their routes to bypass the Suez Canal, opting for the longer Cape of Good Hope route. This decision reflects the severity of security concerns in region after Red Sea attacks
  • Congestion at European Ports: Rerouted vessels are expected to cause significant congestion, with yard utilization rates at major ports like Rotterdam, Hamburg, and Southampton anticipated to spike to between 85-90%. 

Freight Rate Fluctuations 

  • Diverse Rate Changes: The crisis has led to varied changes in freight rates, with some routes witnessing decreases (Shanghai to Genoa down 11%, Shanghai to Rotterdam down 5%, New York to Rotterdam down 4%, and Los Angeles to Shanghai down 1% per 40ft container) and others experiencing significant increases (Rotterdam to New York up 24%, Shanghai to Los Angeles up 8%, and Rotterdam to Shanghai up 3% per FEU). 
  • Spot Rate Stability: Despite these fluctuations, spot rates ex-China are expected to remain stable in the near term, influenced by seasonal trends and the Chinese New Year holidays. 

Container Ship Supply Dynamics 

  • Market Tightness Amid Supply Adjustments: The Red Sea disruption has tightened the container ship market, with a 6% cut to global capacity due to increased transit times between Asia to Europe and the US East Coast. This capacity cut is somewhat mitigated by the expected delivery of approximately 478 new ships in 2024, adding about 3.1 million TEUs of capacity and indicating a 10% growth in the global container fleet. 

Maersk Predicts Prolonged Disruption 

Maersk’s Advisory on Extended Diversions: Maersk has prepared its customers for prolonged disruptions, indicating that the crisis could extend into the second half of 2024, with the company advising on longer overall transit times to be factored into supply chain planning. 

  • CMA CGM Suspends Suez Canal Transits: Joining other major carriers, CMA CGM has suspended all ship transits through the Suez Canal as of February 1, opting for the safer, albeit longer, route around the Cape of Good Hope due to security concerns in the Red Sea. 

Impact on Global Supply Chains and Maritime Safety

Cumulative capacity change mid-dec'23 to now
Image source: Sea-Intelligence
  • Capacity Adjustments and Trade Lane Impacts: The shift in routing has led to a modest capacity change, with the Asia-North America East Coast and West Coast trade lanes experiencing a contraction of -7.5% and -6.9%, respectively, whereas the Asia-North Europe and Asia-Mediterranean trade lanes saw a lesser impact. 
  • IMO’s Efforts to Restore Maritime Safety: The International Maritime Organization (IMO) is actively working to address the crisis, emphasizing the need for continued dialogue among all parties to avoid further escalation and ensure maritime safety. 

Red Sea Tensions and Panama Canal Downturn

The global shipping industry is facing compounded pressures from the Red Sea crisis and bracing for uncertainties. Recent reports from the Panama Canal Authority indicate a drop in average daily transits to 22.6 in January 2024, a significant decline attributed to water-saving measures and a 34% decrease in total transits compared to the prior year.  

This reduction, particularly affecting container ships with a daily average falling to 6.6, highlights the broader logistical challenges faced by the industry amidst ongoing geopolitical tensions and infrastructural constraints. These dual crises underscore the vulnerability of global trade to regional disruptions, posing a complex challenge for international logistics and supply chains as well as economic growth.

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