Red Sea Disruptions Expected to Bring Container Shipping Back to Profitability

Brands and retailers have endured longer shipment times and an increase in costs during the Red Sea crisis as repeated Houthi attacks force commercial vessels to avoid the waterway entirely. But ocean carriers stand to generate a boost in short-term profitability due to the accompanying rise in freight rates, which are exceeding the costs of re-routing, according to a research note from credit ratings agency Fitch Ratings

Companies like Mediterranean Shipping Company (MSC), Maersk, Hapag-Lloyd, CMA CGM and Cosco are all charging higher rates to ship ocean freight than they were throughout 2023, when spot rates declined throughout the year.

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The Red Sea-driven rate increases should benefit these carriers. But whether that advantage is realized in the current quarter or the periods ahead remains to be seen, according to Raman Singla, a director at Fitch Ratings.

“Not all the increase in spot rates flows immediately through to revenues as a large part of the business is on annual contracts,” Singla told Sourcing Journal. “This impact would also vary across companies as the portion of contracted business and trade lane exposure varies…As the current spot rates flow through to contracted part (contract negotiations generally happen in first half of the year), this benefit might be more visible in Q2 2024 and in Q3 2024. A lot depends upon how long the disruption lasts and what is the view of the shippers when negotiating contracts.”

These firms can charge more for both spot and contract rates depending on factors such as overall supply and demand, fuel costs and distance travelled—which has increased as much as 10-to-14 days as many vessels spurn the Red Sea in favor of sailing around Africa’s Cape of Good Hope.

Since Nov. 30, Drewry’s World Container Index (WCI) has increased 137.8 percent to $3,287 per 40-foot container. In that same time frame, the WCI on the Shanghai-to-Rotterdam route—which typically would involve a trip through the Red Sea—leapt up 211.7 percent.

The rates haven’t escalated at the pace they did during the peak supply chain congestion in late 2021 and early 2022, with an average 40-foot container peaking at $10,377 in September 2021.

The number of daily vessels traversing the Suez Canal has continued to dwindle as the skirmish lingers. According to data from IMF Portwatch, 21 cargo-carrying ships and 10 tankers crosses the Suez Canal on March 2. In comparison, on Nov. 17, two days ahead of the first Houthi attack and hijacking of the Galaxy Leader vehicle carrier, 59 cargo carriers went through, along with 35 tankers.

In the research note, Fitch Ratings said it doesn’t believe the Red Sea disruptions, or the concurrent drought in the Panama Canal, point to a structural shift in the sector. While the multiple disruptions can keep freight rates higher for longer, the firm says the impact of the disruptions on rates and supply chains seems to have steadied for now.

The brief growth in prices came after container shipping firms saw choppy waters to close out 2023 as freight rates prior to the start of the Houthi attacks had dipped from year-over-year totals.

As a result, all the major carriers incurred some serious losses.

Maersk reported a net loss of $456 million in the fourth quarter on a 34.1 percent decline in revenue to $11.7 billion. Hapag-Lloyd saw losses before interest and taxes of $217 million on a 48.8 percent dip in revenue to $4.1 billion. And CMA CGM unveiled in its own year-end earnings report that it generated $10.6 billion in revenue, down 37.4 percent annually with losses of roughly $90 million.

In its 2024 Global Shipping Outlook released in December, Fitch Ratings said the Red Sea-driven spot rates should progressively subside amid the “high-single digits” expected addition of net capacity in 2024, powered by a 10 percent increase in new ship deliveries.

“Maersk also noted in its FY23 earnings call that new builds should result in 2-3 percent net growth per quarter in 2024. Due to the Red Sea issue and resulting longer transit times on affected routes, overall about 6-7 percent of global capacity is estimated to be absorbed,” said Singla. “So even if the Red Sea issue persists for the remainder of 2024, capacity addition due to new builds will outpace the capacity absorption due to the Red Sea toward the end of the year.”

There is no estimated timetable in place for when the ongoing Houthi attacks will subside. But in the event of resumption of normal volumes through the Suez Canal and assuming no significant additional costs, Singla said he believes rates should revert back to October 2023 levels in a “relatively short span of time.”