The container ship Maersk Sentosa sails southbound to exit the Suez Canal in Suez, Egypt, Thursday, December 21, 2023.
String | Bloomberg | Getty Pictures
Ships transiting the Purple Sea have confronted assaults in current weeks by Yemen-based Houthis, prompting delivery corporations to vary routes, resulting in a spike in freight charges.
Embarkation on longer breaks round South Africa's Cape of Good Hope pushed ocean freight charges as much as $10,000 per 40-foot container as container ships diverted greater than $200 billion value of products away from the Purple Sea waterway to keep away from Houthi strikes. militants
The USA service provider ship, the Gibraltar Eagle, was hit by Houthi militants on Mondaythe US Central Command stated.
Some market observers count on the disruptions may result in a reversal of fortunes for an trade that was mired in a recession final yr.
“When it comes to increased charges in 2024, this might add a number of billion to the underside of the VOCC even when it solely lasts two or three weeks,” Alan Baer, CEO of the logistics firm OL USA, stated to CNBC in an e mail.
If this lasts for 3 to 6 months [profits] will slowly method 2022 ranges.
Vessel-Working Widespread Carriers (VOCC) are marine carriers that personal and function vessels accountable for dealing with cargo and transportation. Maersk, Evergreen and COSCO are some outstanding VOCCs.
“If this lasts for 3 to 6 months the [profits] will slowly method 2022 ranges as working bills must be decrease than what carriers skilled throughout the chaos of 2021 and 2022,” Baer stated.
Delivery disaster of 2023
The worldwide delivery trade has been in a hunch, dragged down by high inventories and the pullback in consumer spending that led to several failures last year. Before the Red Sea attacks, global shipping container rates were more than halved by 2022, a sharp reversal from the post-pandemic boom.
Asia-Europe rates were on average around $1,550/FEU in 2023, but have now more than doubled to more than $3,500/FEU, said a recent Jefferies research note. FEU is a standard unit for measuring a 40-foot shipping container capacity, which is usually the largest standard size for container ships.
“When we were in November, we almost saw the bottom … rates were just the bottom of the barrel,” said Paul Brashier, vice president of dredging and intermodal at ITS Logistics. He noted that the abysmal rates extended not only to transportation but also to trucks. This was not always the case.
Container shipping companies have earned profits of $364 billion in 2021 and 2022 combined, according to data from the John McCown Container Report, an industry compendium, which is staggering compared to the cumulative loss of $8 .5 billion that the industry has seen from 2016 to 2019. .
But the industry's net income fell 95.6% year over year to $2.6 billion in the third quarter of 2023.
Containers are piled up in Lisbon, Portugal, on January 13, 2024.
Luis Boza/ | Nurfoto | Getty Images
While the recent spikes in freight rates may not help shippers relive their post-pandemic glory days, they will substantially increase profitability.
Profitability of the container line is expected to recover in the first quarter of 2023 with the increase in current prices, ING Senior Economist Nico Luman said in a report last week.
In addition, brokerage Jefferies said it has “significantly raised” 2024 earnings forecasts for some transportation giants on the back of “higher utilization, higher capacity and a tighter supply/demand balance as 'and the result of the redirection of the ships from the Red Sea.”
The brokerage lifted Maersk's 2024 EBITDA forecast by 57% to $9.3 billion, Hapag Lloyd's by more than 80% to $4.3 billion, and increased ZIM by 50% to $0.9 billion.
“We expect the freight recession to come at the end of this year, most likely at the end of the third quarter,” said ITS Logistics' Brashier.
Higher rates for longer?
As the Red Sea tensions continue to rise with the The United States and Great Britain are launching attacks against Houthi targets, and the rebel group has promised to respond, taxes cannot be released soon.
Brashier noted that both contractual rates for ocean carriers and spot market rates may increase further.
The contractual rates, which are currently being negotiated, are usually put in place around January to March each year and are locked for the rest of the calendar year.
The upcoming Chinese lunar year could also raise rates ahead of holiday closures, Brashier said. The holiday traditionally sees an increase in exports out of Asia as companies try to ship more goods before businesses in Asia are offline for at least two weeks.
In general, container shipping will always be [find it] difficult to manage the problem of oversupply.
Daejin Lee
Global Head of Research at Fertistream
Other industry watchers think it's still too early to make definitive predictions.
LSEG shipping analyst Amrit Singh told CNBC that while higher rates are expected to help companies benefit to some extent, it largely depends on how long the disruption lasts.
“The involvement of various multinational navies, including the US Navy, may deter further attacks on ships, leading to the correction of shipping rates,” he said. In December, the United States launched a multinational maritime force, Operation Prosperity Guardian, in an effort to protect trade in the key waterway.
In addition, there is also the problem of a surplus of containers.
Container lines have gone on a ship buying spree following record profits after the pandemic, many of which have come in 2023 and have led to overcapacity in the container market.
“In general, container shipping will still be there [find it] it is difficult to manage the problem of oversupply,” said the Global Head of Research at Fertistream, Daejin Lee.
Shipping demand is still soft, and the latest developments in the Red Sea are helping carriers absorb some of this excess capacity, said Rahul Kapoor, global head of shipping research and analysis at S&P Global.
“This is worse than Evergiven … but not as bad as Covid,” he said. “What we saw [during] Covid was a global disruption.”
