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The crisis in the Red Sea

The crisis in the Red Sea has escalated significantly over the past four weeks. The events are unfolding rapidly and unpredictably and have a substantial global impact.

Therefore, please note that this article was written around midday on January 12, 2024.
In brief, the situation is as follows: most major container shipping companies have opted to reroute their vessels south around Africa instead of passing through the Bab al-Mandab Strait at the southern end of the Red Sea, which is the gateway to the Suez route.

The major exception is CMA CGM, which continues to send some of their large vessels via the Suez route. Although Maersk has stated that they are not using the route, this still applies to their ships sailing under the American flag on the service from the East Coast of the US to the Middle East.

Within the region, local operators continue to navigate through the Bab al-Mandab Strait, and this also holds true for small niche shipping companies between Asia and Europe – particularly those serving the route between China and Russian ports in the Black Sea. Global shipping companies are in the process of establishing services that connect the Mediterranean with the Red Sea, without continuing further to Asia.

Most of the capacity is now being rerouted south around Africa. The impact on delays, capacity, and freight rates is likely to be greater in the short term than in the medium term, should the situation persist.

Supply chain challenges until Chinese New Year

When the ships were rerouted via South Africa, many were in the 'wrong place' and forced to take very large detours. Ships in the eastern Mediterranean had to sail all the way back through the Strait of Gibraltar before they could start their journey around Africa. This means that shippers are currently experiencing delays that are significantly longer than what can be expected in the future. On a normal route from Asia to Northern Europe, the sailing time is extended by 7-9 days, while it will be 10-14 days to the Mediterranean region. On the other hand, the ship 'Gjertrud Mærsk' is an example of being in the 'wrong place.' It departed from New York before the crisis with an expected sailing time of 41 days to Hong Kong. Currently, the expected total sailing time is 81 days.

The timing of the crisis is unfortunate from a supply chain perspective. Many of the first ships that were rerouted were carrying containers needed for the upcoming peak season from China before the Chinese New Year, which this year falls on February 10. This could lead to an acute shortage of containers in Asia in the coming weeks. After the Chinese New Year, the problem is expected to resolve itself, as the seasonal declines in freight volumes coincide with the restoration of the normal flow of empty containers. The container shortage expected over the next few weeks is therefore also anticipated to be resolved by the end of February.

The crisis has an economic consequence 

If the current crisis in the Red Sea persists, the situation is such that the industry has sufficient capacity to navigate around Africa. This, of course, comes at a price in terms of both longer sailing times and higher costs. The immediate short-term effect is rapidly rising spot rates.

The overcapacity that shipping companies faced at the end of last year, resulting from ordering many new ships a few years ago, is precisely why the industry can handle the current situation. However, it should also be noted that the current situation requires the use of all available capacity, and that freight rates are expected to remain significantly higher than a month ago. Moreover, there is no extra 'buffer' in the system to handle another global crisis on top of the current one, should such a situation arise.

Attack on the Houthi Movement

Today (January 12, 2024), American and British military forces carried out attacks on the Houthis in Yemen. This follows a period in which the Houthis had executed 27 different attacks on commercial ships in the region. It is unrealistic to think that today's attacks on the Houthis will resolve the situation by themselves. The Houthis' ability to attack ships is somewhat reduced but will not be eliminated. How much is required before the major shipping companies change their view on the safety off the coast of Yemen is unknown. Therefore, one must assume a baseline scenario where the shipping companies continue to navigate around Africa for several weeks, and possibly months, for the time being.

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