Markets expect the crisis triggered by Houthi militia attacks on cargo ships attempting to cross the Red Sea to continue for a long time. First, the shares of shipping companies rose sharply on the stock market as investors interpreted the announcement by many of them that they would take longer routes to avoid the Yemeni rebels as a hefty additional income for their customers. Now the indices that measure route prices are already showing significant price increases. The World Container Index, published this Thursday by the maritime consultancy Drewry, calculates an average weekly increase of 9% in the cost of transporting a 40-foot container over a maximum of three months, and even 16% on the Shanghai-Shanghai route. Rotterdam, the largest port in Europe and the main entry and exit point for goods to and from China.
A handful of European and Asian companies handle the majority of maritime trade. The Italian-Swiss MSC, the Danish Maersk, the French CMA CGM, the Chinese COSCO, the German Hapag-Lloyd and the Taiwanese Evergreen are the main players, in that order. All have announced that there will be ship diversions to the Cape of Good Hope in southern Africa, a route that will add nine to 14 days to freight traffic between Asia and Europe. Does this mean that the economic situation is critical and prices will rise? Not yet. The orders for the Christmas campaign were placed in good time and are already in the warehouses and shelves. And on Monday, the Suez Canal Authority reported in a statement that between November 19 and December 17, only 55 ships took the longest route around Africa, compared to 2,128 that transited through Suez.
The shipping companies announced their intention to change the route on December 15th, so the consequences will probably be felt more clearly in the next few weeks. Hapag has warned that 25 of its container ships will bypass the area by the end of the year, and Maersk said in its latest statement that it would assess the direction of future ships passing through it on a “case-by-case basis.” If the United States, which is leading the international Guardian of Prosperity mission to stop the attacks, manages to pacify the area, everything could be scary, but the operation is not yet fully operational.
A ship crosses the Suez Canal, in a file photo.STRINGER (Portal)
For this reason, Jordi Espín, responsible for strategic relations of the European Shippers Council, i.e. the companies that pay shipping companies to transport their cargo, says on the phone that panic has not yet spread, but still admits a tense calm and costs additionally. “We have advance warning. Things happen, there are diversions, shipping companies charge surcharges, there is more transit time and more instability, but companies have learned the lesson of the pandemic and are not charging more out of panic that their product is not available, which is why it is not being produced . the so-called bullwhip effect.”
From here there are several possible scenarios. In the best case scenario, the Houthi militia is satisfied with the global response to its action in support of Palestine, or it avoids the clash with the United States and its allies and stops the attacks, which would gradually return to normality in global maritime trade. But there are other, more negative aspects, as Carsten Brzeski, an economist at ING, warns via email. “If the situation worsens, it would lead to further tensions in global trade, higher prices and a partial return to what we saw when the Suez Canal was blocked by the Ever Given oil tanker.” “This is not a return of supply chain problems like this in 2020 or 2021, but just another adverse event in 2024.” In short, one of those black swans that have been so common lately, flying over the end of the course and the beginning of the new year.
The price increase must be put into context. The average price to transport a container is 17% higher than in 2019, before the pandemic, but despite this week's increase they are still well below the crazy years of 2020 and 2021, when current prices increased almost tenfold multiplied. So shipping companies made more money than ever before: anything that floated and could transport something was a machine that generated money.
Ole Hansen, head of raw materials strategy at Saxobank, explains why deflation occurred. “High prices usually cure high prices, and the strength of recent years has resulted in a container market with excess capacity due to the arrival of newly built ships, aggravated by the current economic weakness, which has led to a decline in the volumes transported.” It is a very common phenomenon in other areas, for example oil: when prices rose, new reserves increased, and when the crude oil market was flooded, prices fell.
20,000 ships
Jacob K. Clasen, former CEO of Danish Shipping, the powerful Danish shipping association, and now an analyst for the company, recalls the importance of the Suez route. “Given that more than 20,000 ships, about 12% of global trade, transit the Suez Canal annually, any disruption, such as bypassing the Red Sea route, could result in delays for businesses and consumers.”
In his opinion, this will not lead to a relevant escalation of inflation. “For most products, sea freight costs only make up a fraction of the final price. So even if there were an increase in container spot rates of, say, 20-30%, the impact on the prices of most consumer products would be relatively small,” he asserts.
It must also be taken into account that the price, which fluctuates, is comparable to renting a load at the last minute. However, many companies enter into long-term contracts with shipping companies, which prevents them from being exposed to price volatility when unexpected disruptions arise, as is happening now.
What will happen next? For Hansen, prices are likely to continue to become more expensive, but they tend to stabilize. “In the short term, fares could continue to rise, but given the excess capacity mentioned above, I expect an increase once airlines have adjusted and taken into account the increased costs of longer travel times.”
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