Red Sea gives shipping an Uber-style price surge

Zim Integrated Shipping Services

24/06/2024 09:24

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
       LONDON, June 24 (Reuters Breakingviews) - Anyone who has
tried to secure an Uber at a busy time of day will have
experienced the ride-hailing app’s least appealing feature:
surge pricing. Too many punters and too few available cars mean
the cost of getting from A to B spikes. Something similar is
currently afflicting the global shipping sector.
    In the wake of Iran-aligned Houthi militants launching
missiles at ships heading for the Suez Canal, freight rates more
than doubled from around $1,200 per trip in 2023 to a January
peak of $3,400. That’s according to an index compiled by
shipping platform Freightos which tracks spot prices for 40-foot
containers in 12 major trade lanes. Prices fell back in March
and April, but since May they’ve rebounded to hit $4,500 – over
triple their pre-crisis level.
    On the face of it, the recent shipping cost spike is odd.
The traditional peak season for exporters filling Christmas
orders is some way off. And unlike the aftermath of the pandemic
in 2021, when rates ballooned to nearly $12,000, there should be
enough ships – in fact, the industry has struggled to absorb a
record number of new vessels ordered in response to the
Covid-era disruptions. In 2023, new deliveries of container
ships added record capacity of 2 million 20-foot equivalent
containers (TEU), according to AXSMarine analyst Jan Tiedemann.
Another 3 million will be added this year and a further 2
million TEU in 2025.
    Yet a host of countervailing forces are inflating rates. One
is the cyclical rebound of the world economy. Global
manufacturing output accelerated at its fastest year-on-year
pace in 22 months in May, according to a Purchasing Managers’
Index produced by S&P Global. Combine that with major port
strikes that have hit Germany and France, and could also affect
the United States on the East Coast and Gulf of Mexico, and
rates would have upward pressure even if two other unusual
factors weren’t at play.
    One of these unconventional drivers may be that exporters
have been trying to speed up cargo deliveries to avoid what they
fear is increasingly protectionist trade policy. In May U.S.
President Joe Biden announced sharply raising tariffs on $18
billion of Chinese goods including electric vehicles, batteries,
semiconductors, steel, solar cells and medical products.
    With some of these expected to take effect as soon as
August, this threat has triggered a race to front-load Chinese
exports and stockpiling for importers, according to analysts at
China Industrial Bank-affiliated CIB Research. The United States
contributed the biggest growth among developed markets in
China’s exports of goods in May, official data showed.
    The trouble for exporters and importers is that geopolitical
tensions may get worse. U.S. allies such as the European Union
are already under pressure to expand the scope of their own
tariffs on Chinese electric vehicles. If Donald Trump gets
re-elected in November as the new U.S. president, he may be
inclined to do more. After all, he slapped tariffs on $300
billion of Chinese goods during his last term.
    The final piece of the puzzle is the Red Sea closure itself.
Sailing around Africa via the Cape of Good Hope adds two weeks
of travel in the case of Asian cargo destined for the
Mediterranean and Europe, which means more ships are needed to
maintain trade levels. With 1 million TEU of new ships already
hitting the waters this year, the percentage of idle fleets
still fell to 0.6%, per AXSMarine. That’s the lowest since
around February 2022, and way below a normal healthy level of
around 3%.
    For shipping companies whose bottom line is closely
correlated with the freight rates, this is all very handy. The
higher their exposure to spot prices, the better. Shares of $2
billion Israeli shipping company Zim Integrated Shipping
Services  ZIM.N , which was among the first to divert from the
Red Sea and which has about 65% of its contracts signed on spot
rates, have risen over 170% since mid-December. Denmark’s Maersk
 MAERSKb.CO  only gained 15%, as its spot contract exposure is
typically only about 35%. But given fixed contracts typically
get renegotiated twice a year, and shippers frequently impose ad
hoc surcharges, it’s unlikely to entirely miss out on the
windfall.
    It’s possible that the current demand-inflating noise
surrounding tariffs, economic recoveries and port strikes
fizzles out later this year. But more than six months after the
Houthi attacks hit, shipping companies like Hapag-Lloyd
 HLAG.DE  show no sign of wanting to return to the Suez. Freight
rates for certain routes could rise to up to $9,000 in the next
few months, according to Freightos estimates. When it comes to
adhering to the balance of supply and demand, Ubers and
ocean-going tankers are more similar than they might appear.
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    CONTEXT NEWS
    Global container rates have rebounded since May, rising past
a January peak of $3,400 to reach around $4,500 as of late June,
according to the Freightos Baltic Index.
    U.S. President Joe Biden announced in May that he is sharply
raising tariffs on $18 billion of Chinese imports, ranging from
electric vehicles to solar cells, in a pre-election effort to
protect U.S. jobs. In one of the biggest moves, Washington said
it will quadruple the tariff on Chinese EVs to 100% this year.

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Graphic: Shipping companies with more spot contracts benefit   
https://reut.rs/3VUWhHn
Graphic: Ocean freight congestion worse than start of Red Sea
crisis    https://reut.rs/4b7cehO
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by George Hay and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  CHEN/ 
yawen.chen@thomsonreuters.com))