With the Red Sea disruption coming at the same time as another waterway, the Panama Canal, has also seen disruptions - although for entirely different reasons related to drought conditions at a reservoir feeding the Canal’s locks - observers are now on high alert. As freight portal Flexport said in a webinar: “The major choke points of shipping routes are under severe stress.”
On the liner front, Xeneta Analyst Peter Sand and his colleagues offered their views in a different webinar that coincided with announcements from the US military officials that the US would lead an international coalition of vessels to protect commercial ships transiting the Red Sea. “The container lines have led the entire shipping industry by saying that we’ll not pass…where these incidents have happened,” he said.
Sand added that for cargo shippers, “your cargo is either stuck in the Red Sea, stuck waiting somewhere else, or right now it’s finding a new way around the southern tip of Africa…in essence, supply chains are now disrupted.” Noting that 20% of worldwide container shipping flows through, he said “everyone [in logistics chains] is now involved.”
On the Xeneta platform, Sand said that spot rates from Far East to the Mediterranean had jumped 20% over the previous weekend. When asked by a colleague about the reasons for this jump, he said: “Uncertainty is toxic to anyone operating in logistics,” and he went on to point to the added costs of longer voyages, including fuel costs of circa $1 million, which carriers pass on to cargo shippers.
Speaking about Far East to North Europe run, he suggested that circa 50 “Ultramax” containerships would need to be deployed to uphold current service levels. “They are not readily available,” he said. He also pointing to one carrier, CMA CGM, invoking “force majeure” clauses for re-routing and passing on costs; “that will be a standard,” among the liner carriers going forward, he suggested.
What will happen next is unclear. On the subject of the coalation Operation Prosperity Guardian , Xeneta’s Sand opined “They have a coalition formed- they need to find out, as fast as possible, how can they actually insure that not only containerships can safely get back, but also to avoid rerouting …of oil tankers…gas carriers…dry bulk ships, making this supply chain crisis worse than it already is.”
There are still many unknowns; in its webinar, Flexport’s analysts delved into what might happen in the coming weeks; “While demand could surpass effective capacity before Lunar New Year, the key question is what will demand look like after mid-February.” Flexport advised cargo interests to build additional lead time into inventory planning, book cargo well in advance - four to six weeks prior to planned departure - and plan generally for increased costs. Additional ideas would include exploring alternative routings and premium services for time sensitive cargo, as well as alternative modes - think airfreight.
A different set of views came from veteran equity analyst Jon Chappell, from Evercore ISI, who has the benefit of views from colleagues steeped in the realm of geopolitics. In summarising an Evercore ISI webinar held in the days following Flexport and Xeneta’s broadcasts, Chappell wrote: “[in an earlier research report] we noted a likely binary outcome…where either a government-sponsored security convoy would return the region to some semblance of trade normalcy or a full-blown escalation could send shipping rates in a parabolic manner, similar to when the Suez Canal was closed in 1967.”
Although every scenario is still on the table, Rubin, a Middle East expert who participated in the webinar, highlighted why the latter worst-case is highly unlikely, though also that the former may prove too sanguine.
One interesting sidelight in Chappell’s report, he suggested that rates for tankers have not seen dramatic moves upward, writing that: “a great portion of the oil/gas flows through the region are originating from Russian ports. Therefore, at this point, we believe that oil/gas trade flows will not be impacted in a material manner unless there is a further escalation of hostilities (and we note here that there has thus far been little direct impact to spot rates in the sector).”
Reader resources:
https://www.xeneta.com/blog/red-sea-crisis-experts-discuss-impact-on-ocean-and-air-freight-shipping
https://www.flexport.com/webinars/logistics-rewired-navigating-the-suez-canal-fallout/
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