Is the Sudden Spike in Container Freight Rates an Overreaction to the Red Sea Diversions?

Container shipping rates for immediate delivery between Asia and Europe have surged by 60% in just two weeks, with even more significant increases on routes like Asia to the West Coast of the USA, which are not directly affected by the Red Sea crisis.

container vessel

Market analyst Daniel Richards of Maritime Strategies International (MSI) notes that the spike in immediate market rates far exceeds the costs associated with rerouting.

This raises the question of whether the market is overreacting to the fear of a repeat of the pandemic-era supply chain congestion, leading to severe delays, lack of space, and record container shipping rates.

Richards stated, “fear rather than facts could be driving the rise in container markets rise.” With rates rising higher than the reasonable extra costs due to rerouting via the Cape of Good Hope, it reflects a mix of panic and efforts to secure space in the coming weeks as vessels return to Asia with delays.

While the recent immediate rate increases might be partly attributed to panic, the duration of the Red Sea crisis will largely dictate the impact. Richards mentions that both freight rates and charter rates will be significantly affected if disruptions continue.

A majority of container ships – about 80% according to analyst Linerlytica – have opted to reroute away from the Red Sea and the Suez Canal between December 15 and January 7. This amounts to 354 vessels, accounting for 4.65 million TEU, or 16.4% of the fleet. Only a few small operators like SeaLead Shipping and Newnew Shipping chose not to divert any services.

Linerlytica believes more rate increases are coming, stating, “These diversions will result in an expected capacity shortfall of up to 40% for departures from Asia to Europe and the US East Coast in weeks 4 to 6, with freight rates expected to surge further over the coming weeks.”

The Shanghai Containerized Freight Index (SCFI) reported a particularly high spike in the last week of 2023, with rates increasing over 40% for the week ending December 29, 2023. The following week's index rose more moderately, but still significantly, by 7.8% compared to the week ending January 5, marking the highest level since October 2022.

HSBC Global Research commented in a Global Freight Monitor update: “We caution that the unstable situation in the Red Sea could result in congestion at ports in other regions due to uncertain vessel schedules, and equipment shortages driven by the displacement of empty containers, which could be further compounded by the approaching Lunar New Year (LNY).

“Should the crisis remain unresolved in the next couple of weeks, elevated spot rates could lead to higher contract rates as liners are negotiating their annual contracts with retailers. This could potentially help prevent the sector profits from declining too much vs the expectations before the disruptions.”

Further reading:

Source: Phaata.com (According to SeatradeMaritimes)

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