Cape of Good Hope reroutes likely to persist well into 2025 as industry adapts: ONE CEO

Shipping companies will likely continue to reroute their ships via the Cape of Good Hope and avoid the Red Sea well into next year, as the industry has adapted to the change in trade flows, said Ocean Network Express' CEO Jeremy Nixon Sept. 24.

"There seems to be no political breakthrough, we can't put the vessels, the cargo, the crew at risk. The supply chain has adapted and, that's going to be business as normal," he said on a panel at the Marine Money Week Asia conference in Singapore.

"There is very little political motivation in here for changes," added X-Press Feeders CEO Shmuel Yoskovitz.

"Things will continue to be very fluid... everyone's got a slightly different view. But I think one thing that's persisted is that we see things changing a lot quicker," said Swire Shipping's CEO Jeremy Sutton.

This comes as industry executives at the conference had voiced their concerns over uncertainties on how long the Red Sea situation would persist.

Ships have been moving away from the Suez Canal to avoid Houthi attacks since end-2023, and the longer voyage around the Cape – which adds about two weeks to voyage times – has led to higher freight and insurance costs.

War risk premiums for voyages through the Red Sea now range from 0.5% to 1.0% of the ship's hull and machinery value, compared to just 0.0001% in the Persian Gulf, according to a source familiar with insurance coverage.

Platts Container Rate 1– PCR 1 – North Asia-North Europe Westbound spot cargoes were assessed to average $4,588/FEU in September thus far, compared to a daily average of $1,287/FEU in 2023.

Similarly, Platts Container Rate 3 – PCR 3 – cargoes to the Mediterranean from North Asia were assessed to average $4,629/FEU in September so far, compared to a daily average of $2,085/FEU in 2023.

The reshuffled trade flow had also grown container ship fleet capacity by 11% on the year to 29.5 million TEU, industry body BIMCO said in July.

Tanker flows

Other affected ships, including LR2 tankers – which can carry up to 90,000 metric tons of refined oil products – had commanded a premium of up to $900,000 to $1 million in January for voyages around the Cape of Good Hope on the Persian Gulf-Europe route, instead of the more common Suez Canal transit. Those premiums dropped to around $200,000 on Sept. 25 due to the risks and additional war risk premiums.

Freight had spiked astronomically on the LR2s around the start of the second half of January this year. S&P Global Commodity Insights assessed data shows that the freight rose to a peak of $8.35 million on Jan. 30 this year, from $4.50 million on Jan. 16, marking an 85.55% increase over just 10 trading days.

The rerouting of ships from the Suez Canal to the Cape of Good Hope also resulted in higher bunker fuel consumption, leading to elevated emissions. Tankers will likely burn an estimated 200,000 b/d extra fuel oil in 2024 due to the diversion, according to Trafigura last month.

Such longer voyages also increase the risk of damage and delays as ships tread along less frequent waters, an insurer told Commodity Insights earlier this month.

In the first five months of this year, crude oil and refined oil product flows around the Cape of Good Hope increased by nearly half compared to 2023's average, according to the US Energy Information Administration.

Changing trade flows

The Red Sea disruption came after global trade flows had been altered due to sanctions imposed on Russia, since the outbreak of the Russia-Ukraine conflict in early 2022.

"We see this very big fragmentation now, and over the next five to 10 years, more fragmentation," Nixon said.

"We all used to work in lockstep as one global trading block, which G8 and G20 were all behind and supporting,"

However, much like how the market has adapted to rerouting around the Cape, executives expect the market to continue to adapt to such geopolitical changes and developments.

"The supply chain, customers are smart, and when politicians step in to try to steer or make events happen, it's like water rolling off the top of the mountains and always finding a stream at the bottom," he added.

"Cargoes will move in different ways, but will still ultimately end up in the hands of the consumer... we have to pick up the trends very quickly, adapt very quickly, help those supply chains reconnect."