Listen: Red Sea crisis forces carriers and shippers to rethink strategies as cost of operation rises

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Tanya Kalra:

Hello and welcome to Platts Commodities Focus podcast, a series by S&P Global Commodity Insights.

Container shipping in the last two months has seen turbulence no one had expected. What was expected as a slow quarter started with chaos in terms of prices, cargo movement, schedule reliability, and equipment availability. Now, almost three months into this crisis, after multiple surcharges levied by the carriers, we review what has changed and how strategies have evolved. Restructuring in the existing container alliances also brings a new wave of change and ambitions from carriers, making it an interesting and competitive space for shippers.

I'm Tanya Kalra, associate editor for Asia Containers and your host for today. To discuss continuously evolving containers market, I'm pleased to welcome three shipping experts, Greg Knowler, senior editor, Journal of Commerce, Chris Rogers, head of supply chain research at S&P Global Market Intelligence, and Mohammed Al Ansare, associate editor, EMEA Containers, S&P Global Commodity Insight.

First of all, thank you to all three of you for joining us today to discuss the uncertain container shipping market. Diving right into it, we've seen immediate impact of attacks at the Red Sea. We saw carriers shift vessels from usual route, which is via Swiss to the Cape of Good Hope. Maersk and Hapag-Lloyd were one of the few carriers to switch, and then other carriers followed suit, which obviously led to hike in rates with multiple surcharges that came into picture. So I think, Mo, this would be a question for you. How have box rates fluctuated in the last two months and are we expecting similar volatility?

Mohammed Al Ansare:

Hi, Tanya. Thank you for that. So over the past couple of months, we have seen significant volatility in the container markets. And to get a better understanding of where we are at the moment, let's take a brief snapshot of where we were in Q4 2023. In October, rates reached lows of $800 per FEU on North Asia, North Europe front-haul shipments. So it gives you an idea of it where we were roughly in Q4 2023. At the time, a lot of downward pressures were felt by the market due to various factors such as overcapacity, stunted demand, and the order book. In addition, there were some issues raised by market participants saying carrier rate levels needed to increase to a level where it was more feasible for the liner companies to operate their vessels. So in this period, carriers made a raft of GRI announcements, three in two months, and rates began increasing steadily. Despite this, they didn't reach the heights aimed for by the carriers.

Meanwhile, the conflict in the Middle East started to affect the container markets. Houthi rebels were attacking and seizing ships in the Red Sea from the middle of October 2023. And by the middle of December, like Tanya mentioned, major carriers announced vessel diversions. They transited away from the Suez Canal and instead went around the Cape of Good Hope. Carriers were forced to adapt trade routes and services for the safety of their ships, cargo, and most importantly, the crew. So from December, westbound rates saw increases and those increases carried on through to January. The rate rises continued as carriers announced further surcharges, and they were applicable from the 1st of January. Liners cited the additional costs for the diversions, which resulted in a longer transits, and these surcharges then incorporated the additional spend for running their container ships on longer routes.

And the turn of the year brought significant rate increases across the major trade lanes we cover at Platts. The global container markets peaked at levels not seen since the pandemic. So for example, PCR 1, we monitor shipments from North Asia to North Europe. It peaked to a 15-month high of $6,000 per FEU, and this was on the 9th of January and this is the highest it's been since September 2022. Similarly, Platts Container Rate 3 North Asia to the Mediterranean was assessed at $7,000 per FEU on the 9th of January, and this level was last seen on the 21st of September 2022 during the pandemic. Based on the current rates, Platts Container Rates are down to $3,800 per FEU for North Asia to North Europe movements. Also, to the Med, we're down to $4,500 per FEU where it was in the middle of January $7,000. And these effects have been felt across the global containers markets.

In terms of volatility, I would say at the moment, we are witnessing a softening of the market based on the current market supply and demand dynamics, and that downward trajectory is set to continue as participants expect further drops in freight rates. And they're expecting them to land at some market floor, although I must add it won't be as low as the rates in Q4 2023.

Tanya Kalra:

Right. I agree with what you've said, Mohammed, because in terms of what we're seeing for the Indian subcontinent to East Coast North America, which is our PCR 39, we saw it peak to $5,200 per FEU in the mid of Jan, which is basically double the prices we were seeing before December 15 where all the carriers had rerouted their vessels to Cape of Good Hope. So my question again then becomes is we usually see a lot of volatility during Chinese New Year. We see equipment imbalance, more planning for blank sailings, cargo booking from shippers from the very beginning. Do you feel that Chinese New Year intensified the impact of the Red Sea crisis? And how is the situation right now at different ports, especially the Chinese ports after Chinese New Year?

Mohammed Al Ansare:

Right. In the middle of January, rates reached 15-month highs as previously mentioned, and they were primarily due to the carrier-driven sentiment propping up markets via the general rate increases and the surcharges which were applicable from the start of the year. In light of the Red Sea reroutings, commentators brought up the potential for equipment imbalances relating to container and vessel availability. And in conjunction with the lunar New Year holidays in Asia, for me, there was definitely an early impetus from shippers to push out westbound cargo from Asia before the holidays. They'd been wrestling with the additional transit times, the reroutings, and the potential lack of equipment availability, and that pushed shippers to push out their cargo as soon as possible so that there aren't any issues in the coming months.

If we draw a comparison to the impact of the COVID pandemic with the Red Sea, we notice freight rates rose faster due to the Red Sea crisis if we study the time it took for rates to adjust and increase during the pandemic and during the Red Sea issues. And this is definitely, for me, a big sign that the rates were affected by the carrier-pushed or the carrier-driven sentiment, and it also indicate that the shippers were also desperate to get their cargo out of Asia before aforementioned issues were to take place. Whereas we see those issues haven't really come to light. Based on what we've heard, there haven't been too many issues when it comes to vessel availability.

Although there are indications from sources that container leasing prices have increased in the past few weeks, there are other sources which mention, so for example, Alphaliner cited new buildings are being used to supplement carrier shipping loops, which are covering the disruption in services, as they do their best to maintain their weekly services among the supply chain challenges. The research informs us there are new buildings made up of 16 neo Panamax container ships along with one Megamax vessel. So that's 17 vessels in total which have been added to the market to supplement their Asia-North Europe trade lane.

Tanya Kalra:

That was great, but I think now we need a more holistic and sectoral impact, and I'm coming towards you, Chris. In the multiple reports that you've done, you've mentioned the impact of Red Sea disruptions on consumer goods, especially apparel, furniture, even automotive. And seasonality remains an important factor for these shippers who are exporting from Asia to Europe and US. Could you elaborate on how distant shippers are dealing with this and what was the sectoral impact of this crisis, especially in the European Union?

Chris Rogers:

Yeah. Thanks, Tanya. So I think it is certainly fair to say, as Mo mentioned a few minutes ago, that there's a difference between the short-term impact and this rush to get shipments done before the Lunar New Year, which, if anything, was a little bit sooner than you'd normally see around Lunar New Year, and then what the shippers are thinking about in terms of the rest of the year. Now, clearly one of the few good points about the issues that have occurred is that they've occurred during the off-peak season for a lot of the consumer goods sectors. So if you look at the apparel sector, the bulk of volumes tend to be shipped in the autumn. That's because obviously winter clothes are bulkier than summer clothes. For the toy industry, obviously most of the shipments happen much later in the year.

The sectors that have been most impacted so far are the ones that have requirements throughout the year, and the automotive sector has popped up as being one that has perhaps had the biggest challenges. And there's a couple of reasons for that. The first is a relatively high reliance on imports from Asia into Europe as opposed to sourcing domestically or from North America. The second part is the tendency for the automotive industry to run with a just-in-time inventory management system, which means they have relatively little on stock at any given time. And in fact it only took really a couple of weeks after the disruption started for a couple of the automakers to actually slow their manufacturing and put their plants on hold.

Now, I think what's interesting is we haven't necessarily seen a repeat of that, either in the automotive industry or from other industries more broadly. There's an interesting pattern emerging from the earnings conference calls that companies hold. So each quarter, companies will sit down and they'll talk about what their plans are, what their earnings have looked like, and what certain issues mean for them. When we do some natural language processing on that and say, "Are the comments they're making about their supply chain positive or negative or neutral?" What we've actually seen recently is a rapid increase in the number of neutral comments. Now, we've seen that in the past and we saw it only at this ratio at the start of the pandemic when companies were essentially saying, "Look, we know there's going to be some sort of disruption. We don't know how much it's going to be yet. We don't know how much it's going to cost yet. We don't know what our strategies are going to be yet." And we're very much in that kind of situation at the moment where companies are talking about the impact on their operations.

Actually, we've seen most of the consumer goods industries, whether that's electronics, apparel, or hard lines like furniture effectively have companies say, "Actually, our inventories are sufficient at the moment. And if anything we see this as being more of an inflationary effect, so a cost effect, rather than being something that's causing a direct impact on our operations right now." So I think Mo alluded to a few minutes ago, there was an initial rush but we're now in a relative period of calm. The big question of course is how long does all of this continue on for and what happens as we get nearer the peak season?

Tanya Kalra:

Right. So does that mean that especially shippers involved in the apparel sector, they would want to actually book their orders max by say April so the cargo reaches before say conclude the back-to-school demand to conclude the spring demand so they will have to book it early? Is that something that we will have to look at?

Chris Rogers:

Yeah, I do think we'll see early bookings going on. If nothing else, if the situation continues for the rest of the year, if it still takes 10 days longer to ship everything, then you'll have to make all of your decisions 10 days earlier than you would normally have done. There's also a related issue to that. What we often see for the consumer goods sectors, there'll be an initial wave of shipments for peak season and then there'll be adaptive supplies depending on how initial consumer demand goes. So if you ship a particular type of toy and it proves really successful, then you'll do another round of shipping after. If it takes 10 days longer to do that follow-up round of shipping, that's going to make it a lot more difficult for companies to respond to short-term shifts in consumer demand. But it really does come down to how long do you think these challenges are going to continue for?

I think on that, if I can digress a little bit, our country risk analysts made a very good point that initially the attacks on shipping in the Red Sea were being done by the Houthis in support of the situation in Gaza. More recently though, it's not just Israeli shipping that's been targeted. It's all shipping. And there's a consequence of which that does raise the question, why are they still doing this? And there's of course this issue that they're perhaps getting support from the Iranians, and as a result there's a good chance that the disruptions carry on through much of the rest of this year. Indeed, we've seen at least one of the container lines say already they expect continuation of these disruptions into the second half of the year. So it's never too certain to start planning for peak season, and this year it's got to be even sooner than normal.

Tanya Kalra:

So if we are looking at it from a long-term perspective, if we are assuming that this will go on for a longer time, are you seeing more switch in strategies in terms of maybe a hybrid land-rail combination, maybe inclusion of air movement, especially for the US conduits, movement towards West Coast of US more than the East Coast?

Chris Rogers:

Yeah. I think it's all of the strategy, and it clearly it depends on the practicalities involved. So if you're shipping furniture, you're clearly using one of the rail routes. So you've got rail routes not just from US West Coast to East Coast, but also using rail routes from Asia to Europe, whether that's via Russia, where you have to be comfortable with working with the Russia state railways, or whether that is going via the middle corridor that goes through Kazakhstan, which is less controversial but somewhat more complex and takes a little bit longer.

But what we've seen is effectively the supply chains have healed around this issue already. Most companies actually that have talked about the impact have said, "Actually, we can live with the extra 10 days as long as we know it's going to be 10 days and not 20 days or 30 days. Then actually, we'll just build that into our planning cycle." What we need to then address is what are the extra costs and do we want to rebuild our strategy around that? Clearly, nobody's going to sit there and say, "All right, we're now going to shift our entire sourcing stack because of this extra 10 days of delivery time." However, it does speak to this ongoing need to continually reassess the sourcing stack, and this is just a check in the box against sourcing from Asia for delivery into Europe.

And indeed, many of our customers who I've spoken to and indeed companies who've been talking about this on their earnings conference calls have said this is reinforcing the potential desirability of sourcing from Turkey or from North Africa for distribution into Europe and then using sourcing from Asia to focus more on North America with shipping into the West Coast. One of my favorite lines from Jurassic Park is, "Life finds a way," and we're very much seeing here that logistics finds a way. So I'd be pleased to see how well supply chains have healed around this issue.

Tanya Kalra:

That was a very interesting comment. But moving on, I think I'm moving towards Greg now. Greg, we've seen another very interesting event that took place in the market is the formation of Gemini Corporation between Hapag-Lloyd and Maersk. And now this brings us to the question, we've seen Ocean Alliance also extend their operational alliance further till 2032. How does this impact the other alliances in terms of the trade lanes they're operating? And now, do you feel... I've spoken to a few people and there is this chatter in the market where we feel like Wan Hai is now the only suitor left for THE Alliance. How do you feel about that and the impact of all of this?

Greg Knowler:

Thanks, Tanya. There was always going to be a shake up of the alliances when 2M announced its divorce. But when the Gemini Corporation is launched in February next year, the real winner out of the shake up is going to be the Ocean Alliance. They're going to come out much, much stronger than they are now, and Gemini Corporation is going to be in second place on most of the big trades. But sure, it doesn't really make that much sense to look at the overall picture because it's what happens on the particular trades that's even more important, what the alliances deploy, how much coverage they give to particular trades. And when you look at it that way, Ocean Alliance of course still has the largest number of loops on all the trades except the transatlantic. Gemini are second on much of the big lanes. And even without Hapag-Lloyd, THE Alliance is still very strong on the transpacific. So there's a lot of restructuring and repositioning going on. MSC is the smallest out of the alliances. Obviously it's not an alliance on its own, but it's the smallest out of the four lineups.

Talking about Wan Hai though, that's a very interesting question. Wan Hai is it's an independent carrier. It's very active on the transpacific and intra-Asia, and I think they have some Asia-Middle East coverage as well, but it's not really suitable as a partner to a global alliance. What could happen, what the analysts are predicting will happen, is that as MSC works out its market position and where it fits in against these other alliances, it could decide to expand its slot and vessel sharing agreements deals with Wan Hai and possibly with Zoom, which is another big independent carrier. What MSC does, of course it's made it very clear that it wants to remain a standalone carrier and there's no plans to hook up in another alliance, but it will certainly be looking around for new partners.

Chris Rogers:

Greg, if I could jump in, one of the interesting things I've seen over time is this willingness of the carriers to pursue almost cross-alliance routes and more fragmentation. Do you think we might see a period of more of these examples of let's say Hapag was with a firm outside of Gemini and having more of these hybrid approaches as the system begins to settle down a bit? Or do you think everyone's just going to stick to their knitting?

Greg Knowler:

No, I think you're right. Maersk has already said they've got slot agreements all over the place. Hapag-Lloyd will have as well outside of the arrangement. And I think you're going to see a lot more of that, especially as the alliances all start to settle down. THE Alliance obviously is going to be out there looking for new deals, especially on places like the transatlantic where they've lost Hapag and they've lost a huge percentage of their cupboard.

Tanya Kalra:

Right. I think that would be very interesting to see this because after the 2M dissolution, MSC always maintained the stance of not including other carriers and entering into an alliance. But with this and with the capacity that they have, with the order book that they have, it will be interesting to see how MSC operates into all of this chaos. Then again, bringing into the schedule reliability part of it, Gemini is going to use the hub and spoke model as they've mentioned, and they are aiming for a 90% plus reliability through that model. With the chaos in the market right now, especially considering the schedules of the vessels, do you think that is a very ambitious target or do you think that this can be something that is achievable right now?

Greg Knowler:

Well, hopefully the chaos in the market is gone by next year, but you never know these days. It seems to be chaos every few months in some way. But the stated goal of 90% schedule reliability is really, really ambitious considering that sort of on-time performance hasn't been seen in years. I think the pre-pandemic was around about 70 to 80% was the average. It doesn't take much to upset schedules.

So the way Gemini will be based is on a hub and spoke model, and how efficient that model is going to determine whether it succeeds or fails. The call sizes are going to be massive. They're going to have a huge network of shuttles and feeder services connecting to all the ports in Asia, in Europe, and in North and South America. That's going to need some sort of next level synchronicity to make all that work. So there's a lot of moving parts in their strategy and there's a lot that can go wrong, and it doesn't take much to upset schedules and have a bit of a knock-on effect. They will control in most of their own terminals so that will obviously help, but it's still, it's going to be a challenge to keep everything on track. And 90% reliability, I suppose you have to have a target. You've got to have a goal. Everyone needs a goal, but whether it's achievable remains to be seen.

Chris Rogers:

Do you think the shippers are actually going to care about the model? I wonder whether certainly the firms that we speak to about their logistics networks, what they obviously care about, reliability, but they probably care more about cost, about total cost of delivery. And if it's going to take a bit longer and/or we need to build in an implied reduction in schedule reliability, then so be it. I wonder whether the main issue is that they might lose market share because people don't want to take a chance on the new network or whether they just say, "We trust Maersk and Hapag-Lloyd. It's a new thing, but who cares?"

Greg Knowler:

Totally. That's a very good question, Chris, because everyone thinks direct is better, but do shippers really care about transshipment? Is it even do they even worry about that or like you said, they just need to be on time at an acceptable cut?

Chris Rogers:

I think tracking's going to be quite important. One of the big emergent trends for a lot of the shipping firms who we speak to within their supply chains is using data and using predictive analytics. So I think as long as the communication from Gemini on where things are and providing proper visibility, whether that's direct to a BCO or through to a forwarder, I think that'll be absolutely key. So it'll be interesting to see what technology aspects are put in place to ensure that the visibility is there. Certainly trying something new is great, but building trust maybe will require those extra data systems.

Tanya Kalra:

Absolutely. I agree because the shippers that I've spoken to right now, and this was again a concern because most of shippers do not prefer transshipments, right? And this is basically all of this model is based on increasing transshipments. But when I spoke to some people, the notion is that, one, they trust Maersk and Hapag-Lloyd, and the other thing is they're okay with the transshipment part of it as long as, one, they're getting the same sailing time that they're getting right now, or their cargo reaches absolutely on time, and especially with perishable goods. And the second is the cost factor.

They're not expecting a much increase in cost right now, but they're looking out for it and they'll probably review it after February 2025 when all of this comes into place. But I think this would be my last question. This is open to all three of you. We've seen a very interesting announcement by CMA CGM where they've reiterated their stance and they're looking into moving again through the Red Sea on case-to-case basis. Do you feel like this is something that is doable in this environment? And do you feel like this would be a domino effect and other carriers will follow suit?

Chris Rogers:

Speaking for the cargo owners themselves, they probably don't care too much about which route is used as long as the products get there. One of the most dangerous things for CMA in using this route, putting aside the fact that we need to think first and foremost about the sailors on the vessels rather than the cargo on the vessels, is can CMA guarantee that the vessels are going to get through and not have to turn back at some stage? Now, there is a need for shipping into the region for the ports that are in the Red Sea, and not all of the cargoes can be delivered into those areas by alternative transportation modes.

The other part is the economics of it. Obviously the increase in war risk insurance greatly outweighs the cost of additional fuel, which is why vessels have generally been shipped around the Cape of Good Hope. So whether CMA has got better insurance rates or is willing to self-insure, that all remains to be seen. Clearly, we haven't yet seen other shipping firms say they're going to follow suit, so this may be CMA specifically dealing with specific cargoes for specific ports.

Greg Knowler:

Yeah. From my side, I think there's no real incentive for carriers to rush back to the Red Sea. Like Chris mentioned, the war risk insurance for going through the Red Sea is huge. That hasn't come down. And also very importantly, seafarers never signed up to be targeted by missiles. So I think before carriers start to all go back to the Red Sea, they're going to have to be very, very certain that it's safe to do so. So I don't think there'll be any rush to do it. CMA was the last carrier to put its ships out of the Red Sea. So yeah, it's interesting that they're looking at ad hoc putting them back.

Tanya Kalra:

With this, we come to an end to a very interesting conversation. We will continue to track these developments in the container shipping market. Thank you, Chris, Greg, and Mohammed for joining us for this discussion. This podcast was produced by digital editor Shikha Singh in Gurgaon. Thank you for listening.