Container Shipping Costs Escalate Due to Security in Red Sea

In recent developments, the shipping industry is witnessing a substantial hike in short-term rates for container transport across Asia, Europe, and the United States. This escalation is primarily due to a decrease in shipping capacity, a consequence of growing security concerns for cargo ships traversing the Red Sea.

Presently, the spot rate for transporting a 40-foot container from Asia to Northern Europe has surpassed $4,000. This figure marks a staggering 173% increase since the onset of route diversions that commenced around mid-December, according to insights from Freightos.com, a renowned platform for cargo booking and payments. This information was disclosed late Wednesday.

Additionally, the price for shipping the same size container from Asia to the Mediterranean region has escalated to $5,175, as reported by Freightos. Furthermore, certain carriers have declared their intention to set rates exceeding $6,000 for this particular route, starting from mid-January. Concurrently, the freight cost from Asia to the East Coast of North America has witnessed a 55% rise, reaching $3,900 for a 40-foot container.

Judah Levine, the head of research at Freightos, highlighted that the current rates for services from Asia to both Northern Europe and the Mediterranean are more than double their January 2019 levels. However, they remain significantly below the peak prices experienced during the COVID-19 pandemic.

A separate indicator of spot container rates, published on Thursday by the Drewry World Container Index, also confirms this upward trend. Since December 21, rates from China to Europe have more than doubled, and those from Shanghai to Los Angeles have increased by 30%.

This surge in rates is partly attributed to a decline in traffic through the Suez Canal, which has dropped by over a quarter in recent days. This reduction is a result of vessels opting for longer routes to circumvent potential missile attacks from Yemen’s Houthi militants, who are backed by Iran. The Houthis have expressed their intention to target vessels with any perceived association with Israel, although these connections seem increasingly speculative.

Shipping companies typically increase their prices in response to stretched capacity. They also impose additional surcharges to cover the extended delivery times and during periods of heightened activity.

In a related development, the recent explosions near the grave of Iranian commander Qassem Soleimani, which resulted in nearly 100 fatalities, pose a threat of escalating the Middle East conflict. Tehran has attributed these attacks to a retaliation against its stance on Israel. However, the United States has stated that neither Israel nor it was involved in these attacks.

Judah Levine, in a blog post, remarked, ““This is no longer taking place during the holiday lull either — demand may be increasing as shippers start to pull forward volumes to make up for longer transit times and in preparation for China’s Lunar New Year holiday in early February,” He further added, “Together, this could increase the risk of congestion.”

A notable decline in Suez Canal transits has been observed, with a 28% reduction in the 10 days leading up to January 2 compared to the previous year. This data was released on Wednesday by the International Monetary Fund’s PortWatch platform, developed in collaboration with Oxford University. The data suggests that about 3.1% of global commerce is being rerouted away from the Red Sea.

The IMF has recognized the Red Sea as a crucially important maritime passage, facilitating over 19,000 vessel transits annually. A noticeable decrease in traffic has been observed since December 16, as stated in a report by the Washington-based institution.

For cargo owners, the current scenario presents the risk of sustained high spot rates, potentially impacting their bargaining power in upcoming long-term contract negotiations, which typically occur between March and May. The majority of ocean freight is governed by rates established in these contracts.

The repercussions of these developments are not confined to the container sector alone.

The oil tanker market has also experienced some gains, particularly for vessels transporting refined fuels like gasoline and diesel. According to a research report by shipbroker Braemar, earnings for ships transporting refined fuels from the Mediterranean to Japan via the canal have risen from about $8,000 per day in early December to $26,000 this week.

Braemar analysts have described any route involving the Red Sea as "red hot."