Suez Canal

End of Europe’s exemption for ship alliances adds to tough market conditions Europe's planned termination of the so-called 'block exemption rule' that enables container liners to closely cooperate within alliances will limit room to manoeuvre. This particularly applies to the container liners outside of the largest players, and adds to already challenging market conditions.   Europe plans to end the anti-trust exemption for container alliances The European Commission has announced it will not extend the block exemption for container liners which expires 25 April 2024. This exemption enabled container shipping companies with a combined market share of up to 30% to provide joint services to clients, and resulted in the formation of three large alliances, 2M (Maersk, MSC), The Alliance (Hapag-Lloyd, HMM, Ocean Network Express and Yang Ming) and The Ocean Alliance (CMA CGM, Cosco, OOCL, Evergreen), as companies sought to manage capacity and share their networks. The exemption in the cyclical container liner market was first introduced during the global financial crisis in 2009 and extended in 2014 and again in 2022. In the early stage of the pandemic - when container liners suffered unprecedented uncertainty - the regulation was again extended. But with consumers stuck at home shifting their spending to goods, and ports and supply chains across the world congested due to closures and events such as the blockage of the Suez Canal, freight rates skyrocketed, and profits reached record highs in 2021 and 2022. This sparked criticism around the rationale for the exemption among shippers and policymakers.   The golden age in container shipping has ended - but the market structure has also changed Container rates have collapsed since early 2022 and spot rates on Asia to Europe trade have dropped below pre-pandemic levels. The sector has also faced a combination of faltering demand and a flood of newly ordered vessel capacity coming online. However, the European Commission has acted in light of what it sees as structural market changes. There has been consolidation. And on top of this, several liner companies including Maersk, CMA CGM and MSC have actively taken stakes in port terminals, logistics services providers and even air freight services over the past two years. With this ‘integration,’ these companies have developed a presence across supply chains and an ability to offer end-to-end logistics solutions.    End of the exemption makes offering joint services and capacity management more difficult The expiry of the block exemption means that cooperation in terms of joint services will be restricted and managing capacity (by for instance taking out (‘blanking’) sailings) will be more difficult. For some container liners, it will also be more difficult to offer specific port calls to clients. Profits in container shipping have been on a downward track from elevated levels since the second quarter of 2022. Global container volumes have been falling this year and are expected to grow only slightly this year amid global headwinds for trade. At the same time, the market is set to be flooded by a wave of new vessels coming online (TEU-capacity will be expanded by some 27% in 2023-2025) making the conditions in container shipping more challenging.   Alliances won't (necessarily) cease to exist, but room to manoeuvre will be more limited The EU and US have followed the same approach regarding the exemption, with the ruling also under review in the US. Either way, the EU is already part of large trade routes and the lifting of the exemption will limit the room to cooperate and weigh on market conditions, especially for pure container liners. MSC and Maersk decided earlier to dismantle their cooperation, possibly because market leader MSC has become big enough by itself. The other two alliances won’t necessarily cease to exist, but there will probably be a higher regulatory burden for joint operations under general competition rules.  

Red Sea avoidance signals a disruptive start to 2024 for trade and supply chains We didn't expect a quiet year for trade and supply chains, but before it's even started, the vital shipping sector has been once again been pushed into the centre of geopolitical conflicts. Companies have started avoiding the Red Sea and this already leads to significant delays in supply chains and prices hikes on the spot market – and it could still get worse.   What's going on? Following several drone attacks from Houthi militants on merchant vessels, most of the world's largest container liners – including MSC, Maersk, CMA-CGM, Hapag Lloyd, Evergreen and HMM – began avoiding the 30km wide Bab al Mandeb sea strait to the Red Sea and the Suez Canal, which handles some 12% of global trade. They detoured their ultra large container vessels around Cape of Good Hope from mid-December. Roughly half of the shipped freight through the canal comprises containerised goods, making it the most important artery for container trade. The trade lane is also a vital corridor to ship oil and oil products from the Persian Gulf to Europe and the US. Re-routing around the Cape adds some 3,000-3,500 nautical miles (around 6,000 km) to the journeys connecting Europe with Asia. At a speed of 14 knots, this means around 10 days is added to the duration of the trip. Since almost all container vessels are detoured, this could push up vessel capacity consumption by over 20-25%, which would turn overcapacity into a short-term shortage.  An international coalition has been created by the US to provide naval escorts, but the risks won’t disappear immediately, and the rerouting continues.   Global container spot rates are on the rise again on the verge of 2024 World container index (WCI), freight rates in $ per FEU (40 ft container)   Container rates on the rise and delays upcoming, but impact is all about long it lasts The massive re-routing of vessels will lead to significant delays on arrival in ports. And this will also have knock-on effects on connecting vessels and the turnaround of vessels. In European ports like Rotterdam (most calls for ultra large container vessels from Asia), but also Antwerp and Hamburg, this could lead to new congestion and delays in delivery further down the line in the first quarter. The weeks ahead of the Chinese New Year are busy in container shipping, but at least for shippers and consumption in Europe, the first quarter is quieter, and inventories are still relatively high. Nevertheless, the mounting delays could turn into shortages or waiting times for some consumer products in the first part of the year. After spiking at unprecedented levels at the end of 2021, container rates returned to their pre-pandemic levels and even below over the course of 2023, as the high demand from the pandemic retreated and a range of newly delivered vessels created overcapacity. But the Red Sea crisis pushed up container global container rates again. For the US, the combination with the Panama Canal's low water restrictions even complicates supply lines to the East Coast. However, an important difference between the pandemic era and the Suez Canal blockage of the Evergiven in 2021 is that the demand-supply balance is currently far less strained. This will most likely prevent rates from reaching multiples again, but it all depends on how long the situation lasts.   Unexpectedly higher freight rates and also more complicated pricing for shippers in 2024 For shippers, freight charges are increasingly opaque as several surcharges add to bold port to port rates. The current situation in the Red Sea region leads to emergency contingency adjustment charges. This also further complicates next to other price supplements, such as peak season surcharge and ‘emissions surcharge’ following the start of the European emissions trading system (ETS). Either way, for shippers and eventually also for consumers, 2024 starts with higher than expected freight rates.  

Red sea shipping disruption rages on and the impact will continue well into 2024 The Red Sea shipping crisis is still growing as almost half of vessels have been rerouted around the Cape of Good Hope in January. This has already more than tripled container rates, and delays and knock-on effects may drag on to the second quarter.   No quick fix for Red Sea shipping risks, impact potentially drags on to 2Q 2023 ended with new disruptions for trade and supply chains following the security crisis in the Red Sea and there’s no end in sight yet. To avoid Houthi militant attacks on their vessels in the Gulf of Aden and the Red Sea, shipping companies and their clients continue to avoid the major Suez Canal route - handling some 12% of global trade - and are rerouting their vessels around the Cape of Good Hope. Sailing around the Cape saves Suez Canal fees but adds some 3,000-3,500 nautical miles (around 6,000 km) to the journeys connecting Europe with Asia. At a speed of 14 knots, this means over 10 days is added to the length of the trip, potentially running up to two weeks. The disruption has raged on for almost four weeks now, and the US-led naval operation ‘Prosperity Guardian’ has not yet succeeded in removing threats and providing a corridor safe enough to resume transit. And risks are unlikely to disappear anytime soon amid intensified incidents, the ongoing war in Gaza and associated geopolitical tensions in the Middle East. This is rattling the shipping sector as well as shippers and supply chain partners down the line, and the knock-on effects could take us well into 2024.      Number of vessels entering the Red Sea has almost halved in the first week of January compared to last year Daily* number of vessels crossing Bab el Mandeb strait end of 2023-early 2024 year-on-year   Vessel crossings nearly cut in half as number of rerouted vessels mounts From mid-December onwards, shipping companies and their clients and charterers started to avoid the risky Gulf of Aden and Bab al Mandeb sea strait (30 km), which is the entrance to the Red Sea and the route to the Suez Canal. And these numbers are still increasing. In the first week of January 2024, around 220 fewer vessels took this route compared to the previous year (-41%) and the figure is on a downward track, meaning the rerouting of vessels is still mounting. As many ultra-large vessels are among those being redirected, the impact on trade volumes is even bigger (-47%).   Roughly half of the shipped tonnage crossing the canal are containerised goods making it the most important artery for container trade. The trade lane is also a vital corridor for shipping oil and oil products from the Persian Gulf to Europe and the US (some 20-25%).   Container vessels most at risk from Red Sea troubles Most of the rerouted vessels carry general cargo and particularly containers. Car carriers sailing from Asia are also being diverted, but these make up a small cargo fraction. In the three weeks after mid-December, some 80% of the container vessels on the route have been forced to change course, a level which reached 90% in the first week of January (according to Clarksons). Market leaders MSC and Maersk have diverted over 60 container vessels around the Cape in just three weeks. Other larger container liners, Hapag Lloyd, Cosco, ONE, Evergreen, HMM and ZIM have followed suit. CMA-CGM continues to use the route but is also opting for detours. All in all, this effectively means that 9 out of 10 containers on the Suez Canal route are currently sailing a longer way. As a result, global container capacity depletion could potentially go up by 20-25%.   The number of Red Sea sailings has dropped the most for general cargo vessels (including especially container ships) Daily number of vessels crossing Bal el Mandeb strait per type (rolling seven-day average)    

Tankers continue to sail, but the number is diminishing as risk of assaults comes at a cost Most tankers are continuing their journeys, but this doesn’t mean the tanker market is not affected by the threat of attacks on vessels. Spot rates, including those for very large crude carriers (VLCC) chartered on this route from the Persian Gulf, are under strain. And in the meantime, insurance market premiums for Red Sea crossings have surged. So different from what some may think, the Red Sea - Suez Canal shipping route isn’t blocked, but it is certainly increasingly affected.   Container rates on most effected Asia-Europe route more than tripled while the global average doubled Container spot rates on one of the largest and most affected global trade routes, Asia-Europe, have tripled compared to early December in the first week of January. This marks the provisional end of downward trending prices after earlier record-breaking levels during the pandemic. Spot rates, including surcharges on the Shanghai-Rotterdam route, reached $ 4,400 on 11 January compared to $1,170 at the start of December for a standardised 40-foot container. Most trade lanes across the world are indirectly affected, and global spot rates have doubled over the same period. Several US east coast-bound vessels from Asia have shifted away from the Panama Canal, which is suffering from a drought, and are now also impacted by the troubles in the Red Sea. This comes on top of already extended sailing times.     Container rates to Europe have risen rapidly since Red Sea troubles started World container index (WCI), freight rates in $ per FEU (40 ft container)   Container rates rebounded quickly and more may follow Container sport rates have gone up rapidly following the capacity disruption and rates may go up even further. But we are still far away from the record-breaking levels of early 2022. Current spot prices still hover below half of this peak for the Shanghai – Rotterdam route. A complicating factor for the market is that the world simultaneously faces another chokepoint –  the Panama Canal – also a vital link for trade, and the coinciding Chinese New Year may lead to extra friction this year. But on the other hand, demand for goods is running far less hot than over the pandemic, and with a range of new-build vessels online and still underway there’s much more capacity available. In addition, port operations are generally also running relatively smoothly.   Red sea crisis in a different category for shipping than the pandemic disruption The current market balance of supply and demand is less strained than when Evergiven blocked the Suez Canal in 2021, which should limit the upside for container rates. Having said that, the impact ultimately depends on how long it takes to resume shipments. Rebalancing takes time as we have seen before. If extreme weather events add to the disarray, elevated freight rates could easily be around for longer. But the current disruption also masks underlying overcapacity following a massive inflow of vessel capacity. When the most pressing Red Sea disruption is resolved we can gradually expect renewed downward pressure.     Mounting surcharges complicate the market The container shipping sector is subject to various surcharges on top of base freight rates and several of them, including the bunker adjustment (BAF) and from this year the Emissions surcharge (EMS) are covered by clauses in contracts. But the list of surcharges has continued to expand in response to several events in the last few years. Port congestion surcharges (PCS) were introduced over the pandemic and amid the current Red Sea crisis, container liners have implemented ‘transit disruption charges’ (TSD). This extra fee, combined with a peak season surcharge ahead of the Chinese New Year (PSS), has pushed up container rates. These fees differ among container liners but have become a dominant factor in pricing. Consequently, container transport pricing has turned increasingly opaque and hard to predict for shippers and logistics services providers.