Red Sea diversions, slower ports cause bigger-than-expected issues

Since early May, shippers, forwarders/NVOs, ocean carriers and ports have experienced a return to capacity challenges, soaring spot freight rates, chronic port delays and a surge of traffic volumes.

"Some shippers are having issues securing capacity at agreed contract rates," says the latest update from Drewry. The Drewry World Container Index, a weighted average of spot rates on eight East-West routes, had declined steadily from $3,964/40ft container in January to $2,705 in late April as carrier networks appeared to settle down after the start of Red Sea attacks. Spot rates then surged 74 percent between late April and early June, and we know from shippers that many are asked to pay Peak Season Surcharges."

Drewry had previously identified four factors behind the recent problems:

*Stagnant capacity

*Very strong demand growth

*Shipper behaviour; and

*Operational disruption

Drewry data shows that carriers have added many ships into their East-West services to compensate for the longer routes now used by nearly all the former Suez Canal-dependent carriers. "On the Asia-North Europe route, according to Drewry Container Forecaster data, carriers have increased their number of ships by 24 percent and their total capacity 17 percent."

The large addition of ships, however, resulted in only a two percent increase in the monthly effective capacity per month, to 1.1 mteu, "because these assets are now sailing over longer distances and are less productive than before the Red Sea attacks started."

On the Asia-East Coast of North America route, carriers increased their number of ships by nine percent during the same period "but their effective capacity per month increased… 0 percent!"

This is a key factor behind the current tight capacity: about one million TEU capacity was delivered in the first four months of 2024 but this made zero difference to the monthly effective capacity provided to the market, the update added.

"Drewry considers that the remaining capacity due to be delivered during 2024 will, finally, have an expansionary effect on effective capacity. It will not be a repeat of merely correcting the need for more ships after the Red Sea diversions."

Strong demand growth
Data for May is still limited but it is clear that transpacific volumes and volumes on several other routes are stronger than a year ago.

U.S. containerised imports in May were forecast to reach 2.1 mteu, an increase of eight percent from 1.9 mteu of May 2023, according to the National Retail Federation. "We note that, back in May 22, during the pandemic, U.S. imports totalled 2.4 mteu...so the May 24 figure is still 12 percent lower than during the previous troublesome volume peak."

Shipper behaviour
A survey of Drewry Benchmarking Club members – a group of 100+ multinationals – found that a proportion of international shippers are indeed shipping early this year, the update added. "This precautionary policy, often intended to ensure that shipments arrive in time, may intentionally cause capacity issues and delays because the capacity and infrastructures are stressed.

"In our analysis of the market, we consider that an early peak season is both a short-term change in the market and a signal that there will be a volume vacuum when the peak volumes have been completed."

Operational disruption
Port productivity has also taken a hit in recent months, Drewry says in its report. "The time spent by ships waiting before berthing at high-volume ports tracked by Drewry increased 43 percent between Q32023 and Q22024 – to over 400,000 hours. We heard that a major transhipment port in Asia is experiencing a density of shipping containers in their terminals close to the records of the pandemic. Port strikes on the U.S. East and Gulf coasts could widen the operational disruptions. Therefore, the large-scale changes in liner networks and the relocation of much transhipment activity to new locations have still not normalised.

"It is now clear that operational disruptions and lower port productivity are severely constraining supply. According to preliminary numbers from the Drewry Container Forecaster (Q22024 edition currently being finalised), the supply-demand balance in the global container market has increased."

Red Sea normalcy..when?
With all these moving pieces, Drewry is now considering the likely duration of the Red Sea diversions and the impact of port congestion on supply and supply. "Different scenarios must be considered, and some negative factors are expected to continue after the end of this year.

"Of the four factors causing the current capacity and efficiency issues, only some look to last longer than a year. The end of the peak season, the continuous delivery of new ships and the re-opening of the Suez Canal route could all help redress the current supply-demand problems.

"Frankly, nobody can answer when normal shipping operations will resume (i.e. when the Suez Canal will be back in full-scale use) with any degree of confidence but Drewry has tried to harness the collective wisdom of our customers, many of which are involved at the coal face, to at least formulate an educated guess and get a sense of the range of opinions."

Out of 90 respondents to a Drewry survey, 60 percent felt that the Red Sea diversions will end only by the first half of 2025. Less than 17 percent of the respondents are anticipating an end to the diversions before the end of 2024.

"There is no consensus expectation that the Red Sea crisis will end this year despite diplomatic talks concerning Gaza. Shippers should expect the continuation of long transit times and higher risks of transport and supply chain disruptions plus continued capacity challenges in the short term."