The Red Sea crisis, coupled with robust demand on South American shipping routes, has led to a surge in maritime freight rates
According to the first quarter report of shipping-related enterprises, the Red Sea crisis and the growth of global trade demand led to a significant improvement in the performance of the shipping industry in the first quarter. Maersk’s first-quarter 2024 earnings report pointed out that due to the double impact of increased demand and the Red Sea crisis, shipping market prices rose, and the company’s first-quarter results recovered strongly from the fourth quarter of last year. Author: Wan Anfeng Picture: Insect Creativity
Since mid-April, China’s export shipping prices have risen sharply, hitting a record high since September 2022.
The latest data from Shanghai Shipping Exchange on May 17 showed that Shanghai Export Container Freight Index (SCFI) rose to 2520.76 points, up 45.63% from the end of March.
According to different routes, SCFI of Shanghai-South America route and West Africa route increased the most, up 139.81% and 112.41% respectively compared with the end of March; Australia and New Zealand route increased by 72.70%; European route, Mediterranean route, US-West route and Southeast Asia route increased by 52.96%, 31.51%, 47.49% and 42.96% respectively. The Baltic Freight Index (FBX), which reflects global container freight rates, also showed a significant increase in global container freight prices since mid-April, from $2,353/40 foot equivalent unit (FEU) on April 19 to $3108/FEU on May 17, an increase of 32.1%.
“The original shipping cost from China to East Africa was US $2000/FEU, but now the price has reached a level close to that during the epidemic. At present, the shipping company does not have enough cabinets. They haven’t given us a specific quotation yet. We are waiting for the shipping company to coordinate.” Kenyan Foursquare Logistics employees told the Economic Observer that many shipping companies ‘ships were diverted to other routes such as South America at high prices, resulting in tight capacity on East Africa routes.
Chen Xiang, general manager of Shanghai Tianjun International Shipping Logistics Company, said that since March this year, China export shipping prices have doubled. It is expected that in June, the US-West route will rise to US $6000/FEU, the US-East route to US $8000/FEU, the West Africa route to US $10000/FEU, the East Africa route to US $6000/FEU and the Red Sea route to US $5300/FEU.
Red Sea crisis intensifies capacity strain
Since the end of April, Denmark Maersk and France CMA CGM, the world’s two major shipping giants, have twice announced an increase in the uniform freight rate (i.e. FAK rate) on several routes from Asia to Northern Europe, or a peak season surcharge on containers on routes from Asia to South America and West Africa, which is about US $1000-US $2000/FEU. From June, Maersk will adjust FAK rates from Asia to Northern Europe to a maximum of US $5900/FEU, Far East to Mediterranean rates will be up to US $6800/FEU, and a peak season surcharge of US $2000/FEU will be imposed on routes from East Asia to the east coast of South America.
Since November 2023, the spread of the Palestinian-Israeli conflict triggered the Red Sea crisis, the risk of global supply chain disruption intensified, and international shipping prices have experienced a significant rise. Zheng Jingwen, deputy director of the International Shipping Research Institute of Shanghai International Shipping Research Center, said that since mid-April, the route from China to Europe and the Mediterranean Sea has increased significantly, which is also affected by the detour of ships in the Red Sea crisis and the tension of transportation capacity.
The Red Sea region is located in the only place where the Suez Canal must pass. Since mid-November, Houthi armed forces have begun to expand their attack range and attack “ships related to Israel” in the Red Sea. Many cargo ships have been attacked in the Red Sea, the Strait of Mande and nearby waters, which has aggravated the tension in the Red Sea. On December 14-15, 2023, Maersk’s container ships “Maersk Gibraltar”, Hapag-Lloyd “ALJASRAH” and Mediterranean “MSCPALATIUM III” were attacked by missiles launched by suspected Yemeni Houthi armed forces, forcing global shipping companies to bypass the Cape of Good Hope in South Africa to travel to Europe and the Mediterranean Sea.
Zheng Jingwen observed that according to AIS data (automatic ship identification system), container ships exceeding 15000TEU (TEU, 20-foot standard container) basically choose to sail around the Cape of Good Hope. Detour will increase the transportation distance of nearly 3100 nautical miles and the transportation time of 8 – 10 days, and the turnover efficiency of containers and ships will decline, resulting in a loss of market capacity of about 29%. “Even if all the new ships delivered this year are put into the Asia-Europe route, there is still a capacity gap of about 10% on this route.” Zheng Jingwen analyzed that liner companies allocated capacity of other routes to make up for the capacity gap of European and Mediterranean routes, which also caused the transmission effect of route capacity allocation, resulting in the tight capacity of the allocated US routes.
On May 6, COSCO Shipping Holdings Co., Ltd.(hereinafter referred to as “COSCO Shipping Control”) said on the investor interaction platform that at present, the export direction of the company in Europe and America is full load. Xiao Junguang, Secretary General of COSCO Haikong, also responded to the continued rise in shipping market prices during the capital market day event on May 21. He said that since the beginning of this year, the global economy has gradually recovered, and the demand for container transportation market has shown a growth trend. On the other hand, affected by the situation in the Red Sea, the Asia-Europe route chose to sail around the Cape of Good Hope, partially absorbing the new delivery capacity this year. “Recently, with the steady increase of market demand in Europe and America, the market shows certain signs of booming shipments. The effective capacity of the market caused by superimposed deviation decreases, so that the market loading rate remains fully loaded, and the spot market freight rate increases obviously.”
According to the first quarter report of shipping-related enterprises, the Red Sea crisis and the growth of global trade demand led to a significant improvement in the performance of the shipping industry in the first quarter. Maersk’s first-quarter 2024 earnings report pointed out that due to the double impact of increased demand and the Red Sea crisis, shipping market prices rose, and the company’s first-quarter results recovered strongly from the fourth quarter of last year.
According to the performance report of CIMC Group in the first quarter of 2024, the world’s largest container manufacturer, the accumulated sales volume of standard dry containers in the first quarter of the company was 494,400 TEU, up about 499.27% year-on-year, reversing the dismal revenue situation in 2023. CIMC said that although the global economy faced a slowdown in growth in the first quarter, commodity trade showed a steady recovery trend, and the growth rate of container imports in North America accelerated. In order to cope with the impact of increased uncertainty risks in global container transportation caused by the long-term crisis in the Red Sea, customers ‘willingness to prepare containers has increased significantly.
At the same time, the three major indicators of shipbuilding in China increased simultaneously in the first quarter. According to the data of China Shipbuilding Industry Association, from January to March 2024, the number of new orders received was 24.14 million DWT, with a year-on-year growth of 59.0%; by the end of March, the number of orders held was 154.04 million DWT, with a year-on-year growth of 34.5%.
However, affected by rising container transport prices, some freight forwarding companies and small and medium-sized foreign trade enterprises may face losses. Kang Shuchun, president of the International Freight Forwarders Branch of the China Federation of Logistics and Purchasing, said high freight rates during the epidemic had led to the closure of thousands of freight forwarding companies. “At the moment (price increases) have just started and many freight forwarders are stagnating. If it continues, the same result may occur.”
Chen Xiang pointed out to reporters that export shipping prices rose day by day. Because of the shortage of space and containers, freight forwarders often cancel the space booked by shipping companies, which increases the workload of freight forwarders; foreign trade enterprises may face overstock of goods and fail to deliver on time, increasing their risk of default.
Electric vehicle exports, rising demand for South American shipping
The shipping season in the traditional sense is the third quarter of each year. Why does the freight rate in the container market rise across the board rarely, and there is a phenomenon of “low season is not light”?
Zheng Jingwen analyzed that the influencing factors of freight rate formation are complex, and the traditional analysis logic of supply and demand relationship can no longer explain the current market freight rate trend: on the one hand, the impact of “black swan” and “grey rhinoceros” events such as Xinguan epidemic, Suez Canal congestion and Red Sea crisis on the market far exceeds expectations; On the other hand, affected by Sino-US trade relations and tariff policies, the analysis framework of centralized transportation market should be changed from studying macroeconomic trends to studying changes in trade relations and subdividing industry changes. In addition, changes in factors such as fleet turnover and industry regulation should also be taken into account.
Zheng Jingwen said that from the demand side, China’s strong export demand for South American countries is an important reason for pushing up this round of freight rates. In the early stage, the South American route exploded, and the liner company allocated the capacity of Africa and Australia related routes to the South American route, resulting in the tight capacity of the allocated route, the transmission effect of route capacity allocation and the rise of freight rate.
Recently, the demand for South American routes is strong, mainly affected by the adjustment of import tariff policies for new energy vehicles in Brazil and the United States. Since January 2024, Brazil has restored import tariffs on electric vehicles, adjusting tariffs on pure electric vehicles to 10%, and will increase to 18% in July this year and 35% in July 2026. The import tax on hybrid cars, which stood at 15 percent at the start of the year, will rise to 25 percent in July and 35 percent by July 2026. In mid-May, the Biden administration decided to impose a 100% tariff on new energy vehicles imported from China, effective August 1 this year.
Before the tariff increase, the number of electric vehicles exported by China to South America increased significantly in order to avoid tariffs. Brazil’s passenger car imports surged 450 percent in the first quarter of this year compared with the same period in 2023, with China accounting for about 40 percent of imports, mostly electric and hybrid vehicles, according to data released by Brazil’s Ministry of Development, Industry, Trade and Services in April. According to data from the General Administration of Customs, in the first four months of 2024, China’s exports to Latin America increased by 11.4% year-on-year, of which exports to Brazil increased by 24.6%. “A large container can hold about three or four cars, so if tens of thousands of cars are exported, the demand for containers is very large.” Zheng Jingwen said that with BYD, Great Wall Motor and other China automobile manufacturers ‘investment and factory plans in Brazil further landing, China’s transportation demand for South American routes will continue to grow in the short term.
COSCO is accelerating the layout of South American routes. The first quarterly report shows that three 14,000 TEU Latin American extreme container ships have joined the emerging market routes in South America; recently, COSCO Shipping officially opened the first dedicated line from Dalian to Mexico. COSCO Shipping has also recently carried BYD cloud rail trains to Brazil to build Line 17 in Sao Paulo, Brazil, to ease local traffic congestion.
Chen Xiang believes that in order to avoid high import tariffs on China goods, many enterprises choose to shift their supply chains to Southeast Asia and Latin America. Rising seaborne prices for China’s exports could further exacerbate the supply-chain shift trend. Chen Xiang predicted that the price increase of this round of China automobile export to South America may return to normal level from the end of July to the beginning of August.”In addition to automobile export, automobile related supporting industries and parts will also be transported to South America one after another. The demand for goods accumulated in the early stage has not been digested, so the future shipping price is expected to gradually decline.”
From the perspective of shipping demand, Zheng Jingwen pointed out that due to the replenishment cycle that began at the end of last year, cargo demand on European and American routes was stronger than expected, with a significant increase of about 11%. In particular, the export demand for furniture and household appliances increased significantly in the first half of this year, and the demand for containers was obviously driven. On the other hand, since the main products of this round of sea transportation are furniture, household appliances, automobiles, photovoltaic modules and other long-term goods, the sufficient quantity of long-term goods will squeeze the space in the spot market, resulting in tight spot space and short supply.
Zheng Jingwen analysis, Europe in the second half of this year will host the European Cup, Olympic Games and other large-scale sports events, Will also promote the European route freight demand, Especially clothing, textiles and toys and other commodities demand rise, And China and Southeast region is the main supply area of such sports events. Shipments demand for sports events is mainly concentrated in the first quarter and the second quarter, so it is expected that the demand increase in the third quarter will tend to be flat, and the shipping industry will be “busy season” phenomenon.
Shipping market price rise is not only affected by market supply and demand relationship, but also related to shipping company’s price strategy. In Kang Shuchun’s view, since the middle of April this year, the price of the centralized transportation market has soared, which does not conform to the market rules. To a large extent, it is the result of the shipping company “taking advantage of the fire” and raising the price in groups.