Container lines to stay away from Suez Canal for now: Drewry

 Do not expect container lines to immediately return to Suez Canal transits after the Houthis say they will stop attacks on shipping. The return of Donald Trump is another wildcard for the market in a highly unpredictable year, says Drewry in its latest update.

"The next few weeks and months will go a long way to deciding how volatile 2025 will be. The world is craving more details on the economic and geopolitical impact, but until more is known the range of outcomes will remain very wide," says Simon Heaney, Senior Manager, Container Research, Drewry.

Transits of the Suez Canal have plummeted as the majority of shipping lines opted to re-route via the Cape of Good Hope rather than pay the Houthis for safe passage or arrange Naval escort from a supporting government.

"For a start, the Gaza peace deal has only just begun and can at best be described as fragile. Any breakdown will provide the Houthis with a justification to launch missiles again. Secondly, the Houthis could not be traditionally described as honest actors. Their promises do not carry any value and as their actions have proven to be extremely lucrative, in both monetary and influence terms, the motivation to suspend attacks has to be questioned."

Carriers will also be wary that they could be at risk if the Houthis deem their voyages to have any connection with Israel, no matter how tenuous or even false, the update added. "Lastly, the major carriers are about to start phasing in new East-West networks as part of a big change in alliance structures. They will not want to disrupt the operational transition only to then have to redraw them again should events take an unwanted darker turn."

Benefits of re-routing

There is also the fact that carriers have done rather well during the diversions. Re-routing has sopped up a lot of capacity. Drewry estimates that it has reduced effective capacity by around nine percent, which has helped carriers once again post some very strong quarterly profits in the past 12 months. "The relationship between the diversions and carrier fortunes is well understood. Liner stock prices have taken hits whenever Gaza ceasefire talks have looked promising and already some major carriers are seeing downgrades from ratings agencies on the latest development."

Once carriers deem Suez to be a safe option – here insurance costs will be an important metric – "we should expect to see lines set to work to cut capacity in an aggressive fashion. This will come in the form of far greater scrapping (barely 85 KTEU of the 31 million TEU fleet was scrapped last year), heavier use of blank sailings and even longer-term idling (at present only 2.6 percent of container ships have been anchored)."

While the market is drifting away from carriers and that freight rates are likely to decrease when the Suez Canal reopens fully, Drewry feels carriers have the power to manage capacity in a variety of ways. "For this reason, we consider there to be a floor below which carriers will not allow the supply/demand balance, and therefore rates, to fall precipitously."

Trump and shipping
As much as carriers can edit the supply side of the equation, they do not have any influence over demand, which has as many question marks hanging over it. "The biggest wildcard is unquestionably the return to power of Donald Trump as U.S. President. He is promising hundreds of executive orders in the first week after his inauguration on January 20, including on the tariffs mooted during the campaign. We shall soon find out just how radical they will be, but for now the world has no clue as to who, how much or when. This is sub-optimal for a sector that by design craves predictability and multilateral coordination."

More recent reporting suggests that a gradualist approach is being considered, essentially ramping up tariff increases steadily in time, rather than in one go, but again, it’s difficult to know what to believe as Trump deploys a strategic ambiguity and one can never really know his true intentions, the update added.

"He really hates the U.S.’s trade imbalance, which has gotten out of hand in recent years. The U.S. has been running a goods deficits consistently since about the mid-1970s – so for a good 50 years or so – but it really started ballooning around the start of the century as globalisation and the outsourcing of manufacturing went into hyper drive."

As of November 2024, the U.S. trade balance for goods was in deficit to the tune of about $1.1 trillion YTD. After 11 months of last year, for every dollar in exports there was $1.57 cents in imports. "In Trump’s mind, tariffs will close that gap, boost U.S. treasury coffers as other countries will be forced to pay the higher duties – although that’s not how tariffs work – revive domestic manufacturing, add jobs, and make trading partners more acquiescent and negotiate more favourable deals for the U.S.

"Of course, we don’t know yet which countries will be targeted but one assumption might be to look at those with the biggest deficits. As of November 2024, they were China ($270 billion), Mexico ($157 billion) and Vietnam ($113 billion)."

The problem is that there is no telling which country might fall into Trump's crosshairs, and no country can be confident that it will escape the tariff radar, the update added.

In the America First Trade Policy signed immediately after taking oath, Trump said: "The Secretary of Commerce, in consultation with the Secretary of the Treasury and the United States Trade Representative, shall investigate the causes of our country’s large and persistent annual trade deficits in goods as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits."