New cargo ships could ease Red Sea freight disruptions

After the Houthi militia began attacking container ships in the Red Sea last year, the cost of transporting goods from Asia soared by more than 300%, raising fears of disruptions to the supply chain. supply disrupt the global economy again.

The Houthis, supported by Iran and controlling northern Yemen, continue to threaten ships, forcing many people to take a much longer route around the southern tip of Africa. But there are signs that the world will likely avoid a prolonged shipping crisis.

One reason for this optimism is that a large number of container ships, ordered two or three years ago, are entering service. These additional ships should help shipping companies maintain regular service as their ships travel longer distances. Companies ordered these ships when the extraordinary increase in global trade during the pandemic created huge demand for their services.

“There is a lot of capacity available, in ports, ships and containers,” said Brian Whitlock, principal and analyst at Gartner, a research firm specializing in logistics.

Shipping costs remain high, but some analysts expect robust supply of new ships to lower rates later this year.

Before the attacks, ships from Asia passed through the Red Sea and the Suez Canal, which typically handle about 30% of global container traffic, to reach European ports. Today, most sail around the Cape of Good Hope, making these journeys 20 to 30 percent longer, increasing fuel consumption and crew costs.

The Houthis say they are attacking ships in retaliation for Israel’s invasion of Gaza. The United States, Britain and their allies retaliated against the Houthi positions.

Some analysts worry that longer trips could increase costs for consumers. But shipping executives now say they expect their operations to adapt to Red Sea disruptions before the third quarter – their busiest season, when many retailers in Europe and the United States are stocking up for the winter holidays.

The new ships represent more than a third of the industry’s capacity before the order boom began, Mr. Whitlock said, and most will be delivered by the end of this year.

New ships will increase Danish shipping giant Maersk’s shipping capacity by 9%, according to Gartner, and some of its competitors are planning much larger additions. MSC, the largest ocean carrier, is adding 132 ships, increasing its fleet capacity by 39 percent. And France’s CMA CGM, the world’s third largest shipping company, will increase its capacity by 24 percent, according to Mr. Whitlock.

“So it’s just a matter of time,” Vincent Clerc, Maersk’s chief executive, told investors this month, “until the capacity problem is fully resolved.”

This relatively rapid adjustment reflects the fact that global supply chains are in much better shape than they were in 2021 and 2022. At the time, the supply of goods such as household appliances and equipment gardening was limited while demand from homebound consumers was strong. . Ports, shipping companies and others were also grappling with shortages of workers, containers and ships.

Shipping analysts and executives also note that not all ships are taking the long route around Africa to avoid the Red Sea and Suez Canal. So far this year, an average of 30 cargo ships have passed through the canal per day, compared to 48 in 2023, according to the data collected by the International Monetary Fund and the University of Oxford.

That said, rising shipping rates are causing real hardship for small businesses that do not have long-term contracts with shipping companies, making them more vulnerable to a sudden rise in container shipping rates.

They rely on what’s called the spot market, where rates are much higher than most of last year. By 2023, shipping rates had fallen to pre-pandemic levels.

LSM Consumer & Office Products, a company based in central England, imports office supplies from China and India. Marcel Landau, its chief executive, said the cost of shipping a container had risen from about $1,000 before the Red Sea attacks to $3,000. He can’t easily pass the costs on to his customers, he explains, because his prices are set in contracts. As a result, it expects higher shipping costs to eat up about half of its profits.

“Last year was wonderful. It was exactly what business should be,” he said. “And then things started to go wrong when the situation in the Middle East started to explode. »

Lyndsay Hogg, director of Hogg Global Logistics, a company in Hartlepool on the northeast coast of England which arranges shipments for small and medium-sized businesses, said many of her clients were confused by the rising costs of shipping. shipping and that some were delaying shipments.

“We feel like people are nervous,” she said. “We have seen a drop in reservations.”

Shipping a 40-foot container from Asia to Northern Europe, one of the routes hardest hit by the Red Sea attacks, cost $4,587 per container last week, or 350 percent higher than at the end of September, according to spot market data from Freightos, a digital shipping marketplace. (The average for 2021, when shipping lines were extremely tight, was $11,322.)

Tensions in the Middle East have contributed to rising transportation costs, even on distant routes. The cost of shipping from Asia to U.S. West Coast ports has increased 190% since September, according to Freightos.

The Red Sea disruptions come as far fewer ships have been able to pass through the Panama Canal, which is suffering from low water levels. Problems with this canal have also caused delays and detours.

Shipping experts say the detour around Africa is the main cause of rising shipping costs.

Container ships traveling from Asia to Europe stay at sea about 20 to 30 percent longer than they would if they traveled through the Suez Canal. This had the effect of reducing transport capacity. And with less capacity to meet stable demand, prices have risen, analysts say.

Regulators are monitoring the situation.

They want shipping companies to make enough money to keep supply chains running smoothly. But regulators also say they want to protect shipping company customers from price gouging.

Daniel Maffei, chairman of the United States Federal Maritime Commission, expressed concern about the fees and surcharges that shipping companies have added due to the attacks on the Red Sea and the current decline in overall shipping capacity . But he added: “In the medium term, I’m less worried because of all these ships that are going to come into service and then increase capacity. »