Red Sea troubles could end shipping recession as freight rates spike

by -300 Views

The Maersk Sentosa container ship sails southbound to exit the Suez Canal in Suez, Egypt, on Thursday, Dec. 21, 2023.

Stringer | Bloomberg | Getty Images

Vessels transiting the Red Sea have faced attacks over the past several weeks from Yemen-based Houthis, prompting shipping companies to change routes, leading to a spike in freight rates.

Embarking on longer detours around the Cape of Good Hope in South Africa have pushed ocean freight rates by up to $10,000 per 40-foot container, as container ships have diverted more than $200 billion of goods away from the Red Sea waterway to avoid strikes by Houthi militants.

U.S.-owned commercial vessel, the Gibraltar Eagle, was struck by Houthi militants on Monday, the U.S. Central Command said.

Some market watchers expect the disruptions could bring about a reversal in fortunes of an industry that was mired in a recession last year.

“As to the higher rates in 2024, this could add multiple billions to the bottom line of the VOCC even if this lasts for just another two or three weeks,” Alan Baer, CEO of logistics company OL USA, told CNBC in an email. 

If this goes on for three to six months the [profits] will again slowly approach 2022 levels.

Vessel-Operating Common Carriers (VOCC) are ocean carriers that own and operate vessels responsible for managing cargo and transporting them. Maersk, Evergreen and COSCO are some prominent VOCCs.

“If this goes on for three to six months the [profits] will again slowly approach 2022 levels as the operating expenses should be lower than what the carriers experienced during the 2021 and 2022 chaos,” Baer said.

Shipping slump of 2023

Containers are piled up in Lisbon, Portugal, on January 13, 2024.

Luis Boza/ | Nurphoto | Getty Images

While the recent spikes in freight rates might not help shippers relive their glory days following the pandemic, they would substantially boost profitability.

Container liner profitability is expected to recover in the first quarter of 2023 with the current price hikes, ING’s Senior Economist Nico Luman said in a report last week.

Additionally, brokerage Jefferies said it has “raised significantly” the 2024 earnings forecasts for some shipping giants on the back of “higher utilization, higher capacity and a tighter supply/demand balance as a result of vessel re-routing away from the Red Sea.”

The brokerage has lifted Maersk’s 2024 EBITDA forecast by 57% to $9.3 billion, Hapag Lloyd’s by over 80% to $4.3 billion, and raised ZIM’s by 50% to $0.9 billion.  

“We are forecasting the freight recession coming to an end this year, more than likely late third quarter,” said ITS Logistics’ Brashier.

Higher rates for longer?

Overall, container freight will still [find it] difficult to manage oversupply issue.

Daejin Lee

Global Head of Research at Fertistream

Other industry watchers think it’s still too early to make definitive forecasts. 

LSEG’s Lead Shipping Analyst Amrit Singh told CNBC that while the higher rates are expected to help companies profit to some extent, it is largely contingent on how long the disruption continues. 

“Involvement by various multinational navies including the U.S. Navy may deter further attacks on ships, leading to freight rates correction,” he said. The U.S. in December launched a multinational maritime force, Operation Prosperity Guardian, in an effort to protect trade in the key waterway.

Additionally, there is also the issue of an oversupply of containers.

Container lines went on a vessel buying spree following record profits following the pandemic, many of which arrived in 2023 and led to overcapacity in the container market.

“Overall, container freight will still [find it] difficult to manage oversupply issue,” said Global Head of Research at Fertistream, Daejin Lee. 

The demand for shipping is still soft, and the latest developments in the Red Sea are helping the carriers absorb some of this excess capacity, said Rahul Kapoor, global head of shipping analytics and research at S&P Global.

“This is worse than Evergiven … but it’s not as bad as Covid,” he said. “What we saw [during] Covid was a worldwide disruption.”


No More Posts Available.

No more pages to load.