New cargo ships could ease cargo disruptions in the Red Sea

After the Houthi militia began attacking container ships in the Red Sea last year, the cost of shipping goods from Asia rose by more than 300 percent, sparking fears that supply chain disruptions could once again throw the global economy into turmoil.

The Houthis, who are backed by Iran and control northern Yemen, continue to threaten ships, forcing many to take a much longer route around the southern tip of Africa. But there are signs that the world is likely to avoid a prolonged shipping crisis.

One reason for the optimism is that a large number of container ships, ordered two to three years ago, are coming into service. These additional ships are expected to help shipping companies maintain regular service as their ships travel longer distances. The companies ordered the ships as the extraordinary surge in global trade during the pandemic created a huge demand for their services.

“There is a lot of available capacity, in ports, ships and containers,” said Brian Whitlock, senior director and analyst at Gartner, a research firm specializing in logistics.

Shipping costs remain high, but some analysts expect the robust supply of new ships to push rates down later this year.

Before the attacks, ships from Asia would transit the Red Sea and the Suez Canal, which typically handles an estimated 30 percent of global container traffic, to reach European ports. Now most go around the Cape of Good Hope, making those trips 20 to 30 percent longer, increasing fuel consumption and crew costs.

The Houthis say they are attacking ships in retaliation for Israel's invasion of Gaza. The United States, Britain and their allies have pushed back against Houthi positions.

Some analysts worry that the longer trips could drive up costs for consumers. But shipping executives now say they expect their operations to adjust to the Red Sea disruption before the third quarter – the busiest season, when many retailers in Europe and the United States are stocking up for the winter holidays.

The new ships accounted for more than a third of the industry's capacity before the order boom began, Mr Whitlock said, and most will be delivered by the end of this year.

New ships will increase Danish shipping giant Maersk's shipping capacity by 9 percent, according to Gartner, and some competitors are planning much larger expansions. MSC, the largest ocean carrier, will add 132 ships, increasing its fleet capacity by 39 percent. And France's CMA CGM, the world's third-largest shipping company, will increase its capacity by 24 percent, Mr. Whitlock said.

“It is therefore only a matter of time,” Maersk CEO Vincent Clerc told investors this month, “until the capacity problem is fully resolved.”

That relatively quick adjustment reflects the fact that global supply chains are in much better shape than in 2021 and 2022. At the time, the supply of goods such as appliances and garden tools was limited, while demand from consumers stuck at home was high. . Ports, shipping companies and others also faced shortages of workers, containers and ships.

Shipping analysts and executives also note that not every ship takes the long route around Africa to avoid the Red Sea and Suez Canal. So far this year, an average of 30 cargo ships have passed through the canal per day, compared to 48 in 2023. according to data collected by the International Monetary Fund and the University of Oxford.

That said, the spike in shipping costs is causing real pain for smaller companies that don't have long-term contracts with shipping companies, making them more vulnerable to a sudden increase in container shipping rates.

They rely on what's called the spot market, where rates are well above the levels seen for most of last year. By 2023, shipping costs had fallen to pre-pandemic levels.

LSM Consumer & Office Products, a company based in central England, imports office supplies from China and India. Marcel Landau, general manager, said the cost of shipping one container has risen from about $1,000 before the Red Sea attacks to $3,000. He can't easily pass the costs on to his customers, he says, because his prices are contractually fixed. As a result, he expects higher shipping costs to eat up about half of his profits.

“Last year it was great. It was exactly the way business should be,” he said. “And then things started to go wrong when the situation in the Middle East started to explode.”

Lyndsay Hogg, director of Hogg Global Logistics, a company in Hartlepool on England's northeast coast that arranges shipping for small and medium-sized businesses, said many of her customers were nervous about the increase in shipping costs and some were delaying shipments.

“We feel like people are nervous,” she says. “We are seeing a decline in the number of bookings.”

Shipping a 40-foot container from Asia to Northern Europe, one of the routes hardest hit by the Red Sea attacks, cost $4,587 per container last week, up 350 percent from the end of September, according to spot market data from Freightos, a digital shipping marketplace. (The average for 2021, when shipping lines were under extreme pressure, was $11,322.)

The stress in the Middle East has contributed to an increase in shipping costs, even on long-distance routes. According to Freightos, the cost of going from Asia to west coast ports in the United States has increased 190 percent since September.

The disruption to the Red Sea comes as far fewer ships have been able to pass through the Panama Canal, which is struggling with low water levels. That canal's problems have also caused delays and detours.

Maritime experts say the detour around Africa is the main reason for the spike in shipping costs.

Container ships traveling from Asia to Europe spend about 20 to 30 percent longer at sea than if they sailed through the Suez Canal. This in fact results in reduced transport capacity. And because stable demand was met with less capacity, prices rose, analysts say.

Supervisors are monitoring the situation.

They want shipping companies to make enough money to keep supply chains running smoothly. But regulators also say they want to protect shipping companies' customers from price gouging.

Daniel Maffei, chairman of the United States Federal Maritime Commission, said he was concerned about fees and surcharges imposed by shipping companies due to the Red Sea attacks and the current decline in overall shipping capacity. But he added: “In the medium term, I'm less concerned because of all these ships coming online that will then increase capacity.”