The Red Sea Crisis: Container Ships Forced to Take Lengthy Detours
The world of shipping has been rocked by yet another attack on a commercial ship in the Red Sea. The Genco Picardy, a bulk carrier owned by New York-based Genco Shipping & Trading, was hit by Houthi rebels on Wednesday, followed by a barrage of coalition airstrikes in Yemen and more attacks on shipping on Thursday. This has forced container ships to reroute around the Cape of Good Hope, resulting in a surge in spot container rates.
The Drewry World Container Index (WCI) Global Composite, which tracks spot rates for containers, has skyrocketed to $3,777 per forty-foot equivalent unit (FEU) for the week ending on Thursday. This is a staggering 173% increase year-to-date and the highest reading on record since the index was launched in 2011.
This unexpected surge in rates is a result of the ongoing crisis in the Red Sea, which has forced container ships to take lengthy detours around Africa’s Cape of Good Hope. This has disrupted the supply-demand balance in the shipping industry, leading to a sharp increase in rates.
The majority of container shipments are moved under contract rates, but rising spot rates will also impact contract rates negotiated this year. Additionally, shipping lines have been imposing emergency fees to bring contract rates closer to spot rates, further adding to their revenues.
The impact of the Red Sea crisis is not limited to the lanes directly affected by diversions. It has also caused instability in other trades, such as the Asia-West Coast trade, as confirmed by Kyle Beaulieu, Flexport’s head of trans-Pacific. He stated during a recent presentation, “It is a global-network-impacting event and it has brought instability to the TPEB [trans-Pacific eastbound] trade as well.”
The Freightos Baltic Daily Index (FBX), which tracks spot rates for containers across various routes, has also recorded a sharp increase. The global average FBX hit $3,220 per FEU on Wednesday, a 131% increase year-to-date. The Asia-Europe trade has been hit the hardest, with the FBX Asia-Mediterranean and Asia-Northern Europe indexes recording increases of 2.4 times and 3.6 times, respectively, since the end of last year.
The Asia-U.S. trade has also seen a doubling of rates year-to-date, with the FBX China-East Coast and China-West Coast rates at $5,398 per FEU and $3,232 per FEU, respectively. This is a direct result of the Red Sea diversions, as many services have rerouted from the Panama Canal to the Suez Canal.
Data from Xeneta, a leading ocean freight rate benchmarking platform, further highlights the impact of the Red Sea crisis. Its assessments for short-term rates in the Far East-West Coast trade and the Far East-East Coast trade have recorded increases of 2.2 times and 71%, respectively, since January 2020.
The latest data from Platts, a division of S&P Global, also confirms the escalating rate trend. It puts the North Asia-Mediterranean rate at $6,500 per FEU and the North Asia-North Europe rate at $5,200 per FEU, both approximately four times higher than Dec. 1 rates. The Asia-U.S. rates have also seen a sharp increase, with Platts’ latest assessment at $6,000 per FEU for Southeast Asia-U.S. East Coast, $6,200 per FEU for North Asia-U.S. East Coast, $4,000 per FEU for Southeast Asia-West Coast and $4,400 per FEU for North Asia-U.S. West Coast.
In conclusion, the Red Sea crisis has had a significant impact on the shipping industry, and the effects are being felt across various trade routes. The longer container ships are forced to take detours, the higher the rates will climb, resulting in windfall earnings for shipping lines. With no signs of this crisis being resolved anytime soon, it is crucial for businesses to take decisive action and plan ahead to mitigate the impact on their supply chains.
