The container ship Maersk Sentosa sails southbound to exit the Suez Canal in Suez, Egypt, Thursday, Dec. 21, 2023.
Stringer | Bloomberg | Getty Images
Ships transiting the Red Sea have come under attack in recent weeks by Yemen-based Houthis, prompting shipping companies to change routes, leading to a rise in freight rates.
Embarkation on longer detours around South Africa’s Cape of Good Hope has pushed shipping rates up to $10,000 per 40-foot container as container ships have diverted more than $200 billion worth of goods away from the waterway Red Sea to avoid strikes by Houthi fighters.
American-owned merchant ship, the Gibraltar Eagle, was hit by Houthi fighters on Mondaysaid the US Central Command.
Some market watchers expect the disruptions could reverse the fortunes of an industry that sank into recession last year.
“In terms of higher rates in 2024, that could add multiple billions to the VOCC floor, even if it only lasts for another two or three weeks,” Alan Baer, CEO of the logistics company, told CNBC OL USA.
If this continues for three to six months, the [profits] will slowly approach 2022 levels again.
Vessel common carriers (VOCCs) are ocean carriers that own and operate vessels responsible for cargo handling and transportation. Maersk, Evergreen and COSCO are some prominent VOCCs.
“If this continues for three to six months, the [profits] will slowly approach 2022 levels again as operating expenses should be lower than what carriers experienced during the chaos of 2021 and 2022,” Baer said.
Drop in shipping in 2023
The global shipping industry is in recession, dragged down by high inventories and a pullback in consumer spending that led to several bankruptcies last year. Before the Red Sea attacks, global container freight rates had more than halved by 2022, a sharp reversal from post-pandemic boom.
Asia-Europe prices averaged around $1,550/FEU in 2023, but have now more than doubled to over $3,500/FEU, according to a recent Jefferies research note. FEU is a standard unit of measurement for 40-foot container capacity, which is usually the largest standard size for container ships.
“When we were in November, we pretty much saw the bottom … prices were right at the bottom of the barrel,” said Paul Brashier, vice president of freight and intermodal at ITS Logistics. He noted that the exorbitant rates don’t just extend to shipping but to trucking as well. This was not always the case.
Container shipping companies earned $364 billion in profits in 2021 and 2022 combined, according to data from the John McCown Container reporta compendium of the industry, which are impressive compared to cumulative loss of $8.5 billion that the industry saw from 2016 to 2019.
But the industry’s net revenue fell 95.6% year-on-year to $2.6 billion a tonnethe third trimester of 2023.
Containers are stacked in Lisbon, Portugal, on January 13, 2024.
Luis Boza/ | Nurphoto | Getty Images
While recent fare increases may not help shippers relive their post-pandemic glories, they would significantly boost profitability.
Profitability of container liners is expected to recover in the first quarter of 2023 with current price increases, said ING Senior Economist Nico Luman he said in a report last week.
In addition, brokerage Jefferies said it had “significantly increased” its 2024 profit forecasts for some shipping giants due to “higher utilization, higher tonnage and a tighter supply/demand balance as a result of ship rerouting from the Red Sea. “
The brokerage raised Maersk’s 2024 EBITDA forecast by 57% to $9.3 billion, Hapag Lloyd’s by more than 80% to $4.3 billion and ZIM’s by 50% to 0, 9 billion dollars.
“We expect the freight downturn to end this year, probably by the end of the third quarter,” said ITS Logistics’ Brashier.
Higher rates for longer?
As tensions in the Red Sea continue to escalate with the With the US and Britain launching airstrikes against Houthi targets, and the rebel group vowing to respond, the numbers may not abate anytime soon.
Brashier noted that both carrier contracts and spot market rates could rise further.
The contract prices, which are currently under negotiation, usually take effect from January to March each year and are locked in for the remainder of the calendar year.
The upcoming Chinese Lunar New Year could also boost rates ahead of the holiday shutdown, Brashier said. The holiday traditionally sees a surge in exports outside Asia as companies try to move more goods before businesses in Asia go offline for at least two weeks.
Other industry observers believe it is still too early to make definitive predictions.
LSEG chief shipping analyst Amrit Singh told CNBC that while higher interest rates are expected to help companies gain to some extent, much depends on how long the disruption continues.
“The involvement of various multinational navies, including the US Navy, can prevent further attacks on ships, leading to a correction in fares,” he said. The US in December launched a multinational naval force, Operation Prosperity Guardian, in an effort to protect trade in the key waterway.
In addition, there is the issue of container oversupply.
Overall, container transport will continue [find it] difficult to manage the issue of oversupply.
Daejin Lee
Global Head of Research at Fertistream
Container lines went on a ship-buying spree following record post-pandemic profits, many of which reached 2023 and led to overcapacity in the container market.
“Overall, freight will still be carried out [find it] difficult to manage the oversupply issue,” said Fertistream Global Head of Research, Daejin Lee.
Demand for shipping remains low and the latest developments in the Red Sea are helping carriers absorb some of that excess capacity, said Rahul Kapoor, global head of shipping analysis and research at S&P Global.
“This is worse than Evergiven … but not as bad as Covid,” he said. “What we saw [during] Covid was a global disruption.”
— CNBC’s Ganesh Rao contributed to this story.