The longer container lines detour from the Red Sea across the Cape of Good Hope, the more vessel capability might be soaked up, and the upper freight rates will go. Rates are already rebounding. Latest surcharges just announced by ocean carriers imply freight costs are headed higher still.
Container lines have a superbly valid reason to avoid through the Bab-el-Mandeb Strait from a company governance perspective: They can not guarantee the security of their seafarers, ships or cargo on account of indiscriminate attacks by Yemen’s Houthi rebels.
From a bottom-line perspective, the timing couldn’t be higher. The Red Sea-driven rate rise coincides with annual contract negotiations for Asia-Europe service that renew Jan. 1.
If disruptions extend for months, not weeks, they may impact negotiations for Asia-U.S. annual contracts that renew May 1. Quite a few Asia-East Coast services that previously transited the Panama Canal switched to the Red Sea/Suez Canal route on account of drought-induced restrictions in Panama.
The U.S. and its allies have unveiled Operation Prosperity Guardian in an try and persuade shipping lines it’s protected to return back to the Red Sea, a move some analysts initially thought would bring a swift resolution, minimizing container rate upside.
But a press conference by Defense Department spokesman Major General Patrick Ryder on Thursday offered little guarantee that disruptions will end soon — unless civil-war-hardened Houthis are easily cowed by tough talk.
‘Consider it because the highway patrol’
Ryder made no mention of military-escorted convoys for industrial ships. Quite, he said Operation Prosperity Guardian would supply expanded patrols, i.e., what the U.S. Navy is already doing, but with more warships and international partners.
“The [Houthis] have change into bandits along the international highway that’s the Red Sea,” he said. “And so, the forces assigned to Operation Prosperity Guardian will function a highway patrol of sorts, patrolling the Red Sea and Gulf of Aden to answer and assist industrial vessels as obligatory.
“The gap we’re talking about here, from the Suez Canal right down to the Gulf of Aden, is concerning the distance from Boston to Washington, D.C., so that you’re talking about a fairly extensive stretch of water that the international community might be covering.”
Asked whether the member nations of Operation Prosperity Guardian have the authority to attack Houthi targets in Yemen, or whether it’s primarily a defensive operation, Ryder responded, “It is a defensive coalition. Again, consider it because the highway patrol to safeguard maritime.”
There was a veiled threat of retaliation, nonetheless.
“The Houthis have to stop these attacks,” Ryder said. “They should stop them now. They usually really want to ask themselves in the event that they’ve bitten off greater than they will chew in relation to taking over your entire international community and negatively impacting billions and billions of dollars in global trade.”
‘Like 20 police cruisers attempting to cover entire Pacific coast’
James Stavridis, vice chairman of worldwide affairs on the Carlyle Group, addressed the shortcomings of an expanded-patrol-only option in an op-ed piece in Bloomberg on Tuesday.
“The ocean space that the maritime operators must cover is remarkably vast. The Red Sea — from the Suez Canal to the Bab-el-Mandeb on the horn of Africa — is the scale of California. To cover the remaining of the North Arabian Sea and the approaches to the Red Sea, you possibly can add one other chunk nearly double the scale of Alaska.
“Even if you happen to had 20 warships on patrol — a really high number for a maritime mission — it might be like 20 police cruisers attempting to cover America’s entire Pacific Coast,” wrote Stavridis.
“The U.S. and its partners can have to do greater than put additional warships on defensive patrol,” he said. “We have to be prepared to go on offense: to perform offensive strikes against targets ashore … against Houthi infrastructure on the southern Arabian peninsula.”
Nightmare scenario: A ‘lucky strike’
Investment bank Evercore ISI held a client webinar on the Red Sea crisis on Thursday, featuring Michael Rubin, a senior fellow at think tank American Enterprise Institute and director of policy evaluation on the Middle East Forum.
Rubin dubbed Operation Prosperity Guardian “military virtue signaling.”
His concern is that the crisis will escalate if the Houthis get a “lucky strike” that kills American Navy personnel.
“The nightmare scenario is … you’ve gotten a situation like the usS. Cole and there’s a lucky strike on an American ship and 30 people get killed or the ship is crippled. That’s going to alter the dynamic in Washington, especially against the backdrop of an election campaign.”
In response to Rubin, “The model in many individuals’s minds goes back to the counter-piracy efforts with regard to Somalia. There you had a global task force.
“The difference between that and what we’re seeing here is that off the coast of Somalia you were in deep blue territory — deep blue by way of ocean depth and so forth. Due to this fact, the ships we were sending were largely out of range or they may hand around in areas that were out of range until they needed to maneuver forward to render assistance.
“With the Bab-el-Mandeb, you’re going to be in range of virtually anything if you enter that area. So, it becomes a far more difficult problem set for the U.S. Navy. It becomes vulnerable to drones. It becomes vulnerable to cruise missiles, and it becomes vulnerable to hurry boats laden with explosives.”
Asia-Med spot rates rising fast
Spot rate indexes already show a major effect from the Red Sea attacks.
The Shanghai Containerized Freight Index (SCFI) jumped 15% this week, driven by a forty five% week-on-week surge in Shanghai-North Europe rate assessments.
The Drewry World Container Index (WCI) put average spot rates from Shanghai to Genoa, Italy, at $1,956 per FEU for the week ending Thursday, up 40% for the reason that last week of November.
The WCI assessment for Shanghai to Rotterdam, Netherlands, was at $1,667 per FEU, up 42% over the identical period. The WCI Global Composite was at $1,661 per FEU, up 20%.
In response to data from Xeneta, spot rates within the Asia-Mediterranean market averaged $2,327 per FEU on Friday, with the low spot rate at $1,578 per FEU and the high at $3,000 per FEU. The typical spot rate was 45% above the typical contract rate signed up to now three months of $1,603 per FEU.
The typical Asia-Mediterranean spot rate has increased 34% since Nov. 30 and 24% since Dec. 14, in keeping with Xeneta data.
Carriers tack on emergency charges
While rates are rising, ocean carrier profits is not going to increase to the identical extent, because their costs are also up on account of sudden diversions. Longer voyages hike fuel bills and other expenses.
Carriers are actually adding charges to offset those costs.
MSC has introduced a contingency adjustment charge (CAC). It’s adding a CAC of $1,500 per FEU on shipments from the Middle East and India to Europe starting Saturday, and $1,500 per FEU for shipments from the Middle East and India to the U.S. East and Gulf coasts starting Jan. 18.
MSC said that it was invoking clause 19.2 of its bill of lading, which states that it reserves the appropriate to charge additional freight and is just not accountable for delays.
Other carriers are adding similar charges.
Hapag-Lloyd added an emergency revenue charge of $2,000 per FEU on cargo scheduled to transit the Suez eastbound through the top of the month, and $3,000 per FEU on westbound cargo.
Maersk is levying a transit disruption surcharge of $400 per FEU for cargo on the water that was diverted from the Red Sea, and a peak season surcharge of $1,000 per FEU starting Jan. 1 for Asia-North Europe cargo, $2,000 per FEU for Asia-Mediterranean cargo, and $600 per FEU for Asia-U.S. East Coast cargo.
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