Market Q4 Update

With all the action over the past few days, I'm sure everyone is aware of what is happening with the Panama/ Suez Canal, Houthi Rebels, rerouting of vessels via the Cape of Good Hope, etc.

Let us look at some numbers and see if we can anticipate what this might mean moving forward so we can navigate this new environment together.

Situation:

  • Most major carriers have already begun to send their vessels around Africa, so far 55 in total as of yesterday, according to the Suez Canal Authority, due to the obvious safety concerns (see attached map)
  • It is certainly a developing situation, but now that this decision is made it will take some time to unwind it. Even when things get back to "normal" or the safety concern is removed, it takes a long time to shift cargo strings - one vessel is an improvisation, but each vessel that chooses this new route further solidifies the route and will take more time to adjust - think of it like cement drying...
  • Other ships are waiting in anticipation of a joint naval response aimed at restoring security to commercial shipping in the Red Sea, however, it will take some time to get this happening, and it seems from the recent carrier decisions they will not be waiting around for it.
  • The US defense secretary, Lloyd Austin, is being widely tipped to launch Operation Prosperity Guardian this week in a bid to secure the Red Sea, where more than 20 ships have been targeted by the Houthis in the opening 18 days of December. In addition to American naval assets, British and French vessels are also expected to take part in the mission.
  • With almost 20 weekly container shipping services on the Asia-Europe trade calling at multiple ports across Europe and Asia, it is difficult for carriers to recover lost schedules and limit disruption for shippers.

The alternative route around the Cape of Good Hope will add 10-14 days to a container ship voyage. And even after offsetting current Suez Canal toll fees of between $400,000 and $700,000 per ship per transit — which will be rising 15% in January — the longer route will still increase shipping costs by 15 to 20%, according to analysts.

  • Reports are about 2 million in fuel alone.
  • Insurance companies will increase premiums -
  • Sailing times will increase by 28 days – round trip.
  • 30% of the current fleet passes via the SUEZ – Global impact is 12% of capacity will be reduced if the SUEZ issues cannot be contained.
  • Not to mention that the particular routing via the Cape of Good Hope is one of the most dangerous in the world due to weather patterns and various other factors - there is a very good reason why this is not a preferred routing, to begin with.....

Record order book:

  • The real win for carriers and the thing that will raise prices and possibly keep them high is that the length of the Good Hope routing will absorb a lot of the excess capacity (which would have driven the rate down in 2024) for the carriers due to transit time.
  • The longer route around Africa will absorb additional vessel capacity from an industry going into next year heavily oversupplied.¿?
  • Sea-Intelligence estimates that a switch to the around-Africa route will require 1.45 million to 1.7 million TEUs of additional vessel capacity, or 5.1% to 6% of total global container vessel capacity.
  • Another source has the number of 25% of global capacity affected.

Considering the current container shipping order book of 7.4 million TEUs equates to nearly 30% of the active fleet, a 14-year high, there is sufficient capacity available to add vessels to Asia-Europe strings, unlike during the Ever Given blockage, according to Judah Levine, head of research at Freightos.

“In 2021 there were no extra available ships to take the place of delayed vessels at origin ports — this time there is a record level of excess capacity,” Levine noted in a market update Monday.

“Shippers could expect longer lead times due to longer voyages, but operations should continue reasonably well,” he added. “Freight rates will likely increase on these longer voyages too, but due to carriers looking for ways to utilize excess capacity, it is unlikely that rates will spike to levels experienced during the pandemic.”

Rates already on the rise (excerpt from Journal of Commerce)

  • While cargo owners will need to manage disrupted schedules, carriers will find rate levels improving. Two freight-all-kinds (FAK) rate increases in December on both the Asia-North Europe and Asia-Mediterranean corridors have already caused the spot market to spike on Dec. 1 and again on Dec. 15 as carriers withdrew 25% of the available capacity during the month to better match import.
  • Demand to the USA has moved up 10-11% year on year (November) with a good Christmas season so far and a recessionary "soft landing" expected.
  • Another hefty rate increase is scheduled for Jan. 1, 2024, and although only 12% of available capacity is scheduled to be blanked in January, the Red Sea disruption will increase the stickiness of the rate.
  • On Asia-North Europe, Hapag-Lloyd, CMA CGM, and Mediterranean Shipping Co. will set their FAK levels at $3,000 per FEU from Jan. 1.
  • For Asia-West Mediterranean voyages, aspirational FAK rate levels as of Jan. 1 have been set at $3,200 per FEU by CMA CGM, $2,900 per FEU by MSC and $3,200 per FEU by Hapag-Lloyd.
  • Rate levels for East Mediterranean calls have been set at $3,200 per FEU by CMA CGM, $3,100 per FEU by MSC, and $3,600 per FEU by Hapag-Lloyd.
  • No rate set levels yet for the USA and the FMC regulation of 30-day notice is protecting cargo owners as of now, however, MSC and others have announced a $1500 per container increase (attached says per TEU but they just changed it last night to container)
  • Some carriers (CMA, Hapag Lloyd so far) have already declared Force Majeure which enables them to increase rates immediately and route or discharge cargo wherever they see fit - this is a very good time for reviewing the contract of carriage clauses on the back of carrier BL's....

“Should this lead to a longer closure of the Suez routing, it can be managed — however it will require quite a bit of speeding up and will indeed cause elevated rate levels,” Alan Murphy, CEO of Sea-Intelligence Maritime Analysis, wrote in his latest Sunday Spotlight newsletter. “If this repeats itself, it will mean shippers need to prepare for rapidly escalating rates leading up to Chinese New Year, which in 2024 falls on Feb. 10,” he said.


So What Now?

From a macro perspective, here is what to expect:
  • Significantly longer transit times, reduced capacity from all Suez-related origins (Middle East, India, some SE Asia)
  • Rate increases of around 20-30% in the next 1-2 months, then hopefully some stability.
  • Congestion in LA/LB and likely the whole of the West Coast (plan for exacerbated rail delays on IPI, which is already 5+ days delayed currently)
  • Equipment/Container shortages - container velocity - AKA getting containers back to where shippers need them - will be severely impacted.
  • Much like the pandemic, spot rates will likely rule the market for the short term and possibly longer.
From an individual shipment perspective:
  • Anything loaded or booked, you have to take the ride - there are no other options to consider at this time.
  • Communication on updated transits, schedules, and sailings will be advised as soon as they become available from the carriers - they will not be static however, so an ETA today may not be the same ETA tomorrow.
  • Consider sourcing and routing from China/SE Asia to the WC as the new priority for cargo that has a deadline (read into that what you will)

Please see attached references:

Linerlytica Market Pulse

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Evergreen Line Suez Transit Advisory

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Contingency Adjustment Charge MSC

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