By Sophie Xu and Zach Gietzen
The Israel-Hamas conflict has caused upset and outrage on both sides. However, the conflict had not largely affected global trade until a Yemen-based rebel group known as the Houthis began to attack cargo and commercial ships in the Red Sea on October 19th, 2023. These attacks are destabilizing the region and putting a strain on the shipping industry, which was beginning to resettle itself after the turmoil of the past few years. The instability in this region has made using the world's second-largest shipping corridor seem like a dangerous gamble for many shipping firms.
To adapt to the geopolitical environment and avoid passing through the Red Sea, many ships have taken alternative routes around the Cape of Good Hope, which has significantly increased lead times and market rates for container shipment. Upon hearing current events, carriers acted swiftly, preferring the longer and more expensive route rather than the riskier route. Hence, there has been reduced traffic since December 16, 2023 resulting in less news coverage as fewer ships pass through the Red Sea.
In this article, we will be evaluating the Red Sea conflict’s impact on container shipping by observing container shipping rates overall, the shipping rates between the largest and most impacted ports of Europe and Asia, and the implications for the rest of the world.
Europe: A Shipping Industry on the Mend
The shipping industry has faced many challenges in the past four years. as rates soared during the pandemic due to massive demand from consumers reaching a peak of just over $5,000 in the third quarter of 2022. From COVID-19 to the Ukraine War, Europe’s economy has begun to witness these added costs build with no sign of improvement. With the global economy’s rising inflation rates and Europe’s delays in production and delivery times due to these disruptions, these impacts can trickle down across supply chains worldwide. In the graph below based on the spot freight rates by quarter, it is seen that the rates are only recently adjusting back to their original rates from pre-COVID rates.
Maersk Prices per Container from 2018 to 2023 ($US)
Graph by: Statista
The graph above shows how much Maersk, the world's second-largest freight shipping company charged per container from 2018 to 2023. The statistics from Maersk echo those of shipping companies around the world. During the first half of 2023, we began to see rates on a downhill trajectory towards their pre-COVID levels. Although this graph only goes toward the second quarter of 2023, it is only recently that large European shipping companies such as Maersk have adjusted back to pre-disruption rates.
Container Shipping Rates from October 2023 – Now
Just as rates began to stabilize, the Houthi attacks in the Red Sea caused a large spike in spot freight rates. The Houthis are a Yemen-based para-military organization whose goal in the Red Sea is to disrupt vessels and cargo with ties to Israel to support Hamas in the ongoing conflict between Hamas and Israel. The graph below shows the increase in weekly spot freight rates after the Houthi attacks, focusing on the rates of eight major trades between the ports: Shanghai, Rotterdam, Los Angeles, Genoa, and New York.
World Container Index of Eight Major East-West Trades
Graph from: Infogram
Between mid-November 2023 and late January 2024, the spot freight rates have more than tripled. These rates align with the actions taken after the attacks when many shipping firms decided to stop traversing the Red Sea. This means that any cargo coming from Asia headed to Europe or vice versa will not be able to cross through the Suez Canal. To avoid the loss of vessels and cargo many firms have decided to sail around the Cape of Good Hope, which increases the time and cost of shipments. Other firms have opted to send valuable cargo via airfreight, which reduces time but also significantly increases prices and the amount of goods that can be sent per shipment. Under normal circumstances, 30% of the world's cargo volume travels through the Suez Canal. This disruption will have major consequences if left unhandled, the United States and British Navy have begun sending ships to patrol the Red Sea and attempt to stabilize the region for continued trade. As of February 15th, however, the spot freight rates, especially in Europe, have observed a rapid decline.
Europe & Asia: Rotterdam, Genoa, and Shanghai
The Asia to Europe shipping route is the world's second busiest shipping route, and long-term disruptions in this exchange will begin to cause inflationary pressure on the European economy. From Rotterdam to Shanghai for example, rather than passing through the Mediterranean Sea, Red Sea, and then the Indian Ocean, ships are taking alternative routes by going north of Russia through the Arctic Ocean, known as the Arctic route, which has hostile climate conditions with low temperatures and high winds that require insurance and stronger quality material, or south of Africa around the Cape of Good Hope. Nearly 40% of Asian trade to Europe must traverse the Suez Canal, meaning that delays caused by the Red Sea crisis will have a large effect on production schedules on the European continent than any other continent’s economy. If freight rates remain higher for an extended period, consumers will likely begin to bear some of the financial burden through increased consumer goods prices.
World Container Index from Shanghai to Rotterdam
Graph from: Infogram
The graph above, like the composite graph, show a large jump in spot freight costs after the Red Sea attacks between the ports of Rotterdam and Shanghai. Although the spot freight rates are different, the spike and doubling of spot freight rates pre- to post-Houthi attack rates have been a concern for logistics worldwide. While still significantly higher than the average rates between Europe and Asia, via the ports of Rotterdam and Shanghai, there are slightly more favorable spot rates from Asian firms shipping to Europe rather than vice versa.
World Container Index from Shanghai to Genoa
Graph from: Infogram
World Container Index for Shanghai to Genoa (November – December 2023)
Graph from Drewry
The impact on spot freight rates is further emphasized when looking into spot freight rates from Shanghai to Genoa, another Asia to Europe route. It can be observed that the increase is higher than the composite rate, and between November and December 2023, these rates have jumped between 25% and 75% for different shipping carriers.
Global Impact on the Americas and Beyond
While European and Asian ports are most impacted due to their reliance on the Suez Canal, the Americas kept a close eye on the Red Sea status and have started to adapt. A major concern is that the Panama Canal is experiencing lower water levels, meaning that there is more traffic around the Cape of Good Hope as ships that would have passed through the Panama Canal are also unable to pass through the Red Sea, and thus follow the next best alternative. To put into perspective, New York to Shanghai is usually through the Panama Canal. Alternatively, going through the Suez Canal is 17% longer compared to the Panama Canal, and going around the Cape of Good Hope is 37% longer compared to the Panama Canal. Once again, many of these longer shipment times result in businesses having to prepare for higher rates, using more fuel that can build up emissions, buying in bulk to withstand longer order-to-destination times, and forecasting the longer-term impacts of their decisions.
Shipping Route of Containers
Source from S&P Global
World Container Index from Shanghai to Los Angeles
Graph from: Infogram
As seen above, the impact of the Red Sea does not stop at Asia and Europe, and has increased the spot freight rates from Shanghai to Los Angeles. Overall, due to the sharp increase in spot freight rates, the Red Sea conflict has shortened supply and capacity very quickly but is predicted to not exceed economic limits and stabilize. The impact on market rates has made spot rates and contracts stricter, as both carriers and shippers rely on the market and are impacted by its fluctuations. While thus far, the Red Sea conflict has not reached COVID-19 level gradual black swan events, more so falling under the grey swan classification, it has increased market rates and decreased flexibility in negotiations. Operations have continued to remain functional, but there are some increases in other transportation modes, especially if lead times are too long for certain products. If the geopolitical environment around the Red Sea remains hostile, it can be expected that such sharp changes in times and rates will continue to occur in the future and that supply chains must continue to stay updated on current events in this region.
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