Sailing around Africa: the new normal
It has now been two months since global shipping companies began avoiding the Suez Canal and instead chose to sail around South Africa. CMA CGM was the last shipping company to stick to using the Suez Canal, but after another attack on one of their ships, they have now also abandoned the Suez Canal route in favor of the route around Africa.
All parties in the container transport industry must now accept the southern Africa route as the new temporary standard when planning their supply chains for 2024. Moreover, everyone should have an emergency plan ready to execute the moment the situation changes and the Suez Canal becomes a viable route again.
Freight rates are stabilizing, but at what level?
Various market indicators that measure spot prices all suggest that the peak has likely been reached. Regarding cargo from Asia to Europe, spot prices are declining, while rates from Asia to North America seem to be stabilizing. Part of this trend is seasonal; typically, spot prices from Asia to Europe peak 2-3 weeks before Chinese New Year, while spot prices from Asia to North America usually peak around Chinese New Year.
Shipping networks around Africa are beginning to stabilize, meaning the uncertainty and extra delays observed at the onset of the crisis around the Red Sea are decreasing. This, in turn, leads to downward pressure on spot prices. However, the increased costs associated with detouring via Africa mean that rates will not return to the levels seen before mid-December 2023.
It should also be noted that rerouting around South Africa increases the global demand measured in 'TEU-miles' by up to 16%. Shipping companies can manage this by sailing faster and utilizing the structural overcapacity that was already present in the market before the crisis. However, this strengthens the global balance between demand and supply, which leads to higher freight rates.
Shippers can therefore expect a slight weakening in spot prices from Asia to Europe and North America, but at the same time an increase in contract prices further into 2024, as long as the crisis in the Red Sea continues. Shippers with cargo not affected by the Red Sea should also expect an increase in freight rates, as shipping companies will largely redirect vessels from low-profit routes to more profitable routes. This is currently evident, for example, on the westward route across the Atlantic Ocean, where spot prices have begun to rise significantly.
This situation also means that no additional capacity is available on the market in case a second crisis were to arise. Should another crisis occur that requires more capacity, this could quickly lead to a situation similar to that during the pandemic.
Overcapacity and logistical challenges may become a reality after the crisis
On the other hand once the crisis in the Red Sea is resolved, the market will quickly return to a situation of significant overcapacity. Fundamentally, the market balance is currently weak. Global freight volumes grew by only 0.2% in 2023 compared to the previous year, whereas the fleet grew by more than 7%. In 2024, we will see further strong growth of the fleet, which will increase the structural overcapacity. As long as the Red Sea crisis continues, this overcapacity will be absorbed by sailing around South Africa.
Shippers should also have a concrete plan for what to do when ships eventually return to the Suez route. When this happens, there will be a situation where some ships continue to sail around Africa because their route is so far advanced that turning back is not logical, while other ships will take the "shortcut" through the Suez Canal. For European importers, this means they will suddenly experience a week in which they receive two weeks' worth of cargo at once.
This will not only be a problem for ports and terminals. Importers need to have a practical plan ready for execution, not just in terms of further transportation by train and truck but also in how to deal with a doubling of the cargo received in warehouses and distribution centers. It is not possible to predict exactly when this will happen, but when it does, this is the domino effect that will take place.
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