RED SEA CONFLICT UPDATE
We share below the latest commentary made by James Hookham, Director Global Shippers Forum (GSF), as to what the Red Sea conflict could mean for shippers and supply chains reliant on the Red Sea route.
• The risks of retaliatory strikes on merchant shipping in the Red Sea area are now extreme. A working assumption must be that avoidance of the Red Sea and diversions around the Cape of Good Hope will now be the rule rather than the exception.
• Importers in North America and Europe should expect a one-off adjustment to schedules and port calls over the next few weeks, but after that, service patterns should settle into the new longer routes and adjusted port calls, with some stability returning to predicted arrival times.
• The same will apply to east-bound sailings, which may affect the availability of empty containers in Asia in the short-term. But, again, this should stabilize over time;
• Rates on affected trades will inevitably adjust to the higher costs incurred, bearing in mind the greater fuel burn, additional crewing time, insurance and chartering costs. But offsetting these to some extent will be the very substantial savings made in Suez Canal transit fees. These are of several hundreds of thousands of dollars for a typical container ship and these savings should be accounted for by shipping lines when justifying their surcharges and higher rates;
• The cost increases that will be incurred by shipping lines diverting around Africa are known and finite and should not be talked up into a second shipping crisis on the scale of the first one in 2021. There is no chronic shortage of shipping capacity in the way there was during Covid, and there is substantial new capacity expected to be delivered throughout the first half of 2024. Demand for shipping space is also stable, if not declining;
• Shippers commencing contract renewal negotiations over the next few weeks should avoid being ‘locked-in’ to rates based on currently quoted spot prices. Following a satisfactory resolution of the situation, costs and rates on affected trades can be expected to ‘normalise’ even quicker than they did in 2022.
It is worth noting that only 16% of Australia’s container imports come from Europe. The impacts have been more significant for China, India, Vietnam, Thailand and Indonesia as well as European countries including the United Kingdom, Germany, France, Spain and Italy.
Despite the delays and extra costs that this conflict will incur for the Australia-Europe trade lane, the current DP World port dispute is much more damaging to Australia’s economy and supply chains in general, with “disruptions costing importers and exporters about 20% more in logistics costs, purely from the land transport side of things”, according to Niel Chambers from CTAA.
