Red Sea Crisis Escalates Shipping Costs and Disruptions
September 25, 2024
A vital passage for 30% of global container shipments, the Red Sea is currently experiencing an unparalleled crisis in shipping. The turmoil in the Middle East has resulted in assaults on ships which drastically cut down operations. The flow of vessels through the Bab El-Mandeb Strait and the key Suez Canal has been halved by March 2024.
Impact on Routes, Rates, and Port Activities
Significant interruptions in Red Sea navigation have pushed carriers to reroute their ships around Africa’s southern cape. This detour has led to increases in travel distances for tankers and cargo by more than 50%. As a result, as per the Drewry World Container Index, shipping rates have climbed by 270% following the onset of the broader conflict in the Middle East. Prices increased to US$5,182 in August 2024 from US$1,389.5 in October 2023. Additional increases are expected as experts anticipate that shipping demand will continue to be strong until after the Chinese New Year in February 2025.
The crisis has also led to bottlenecks at ports in Barcelona, Shanghai, Malaysia, and Singapore. This is because detours have increased the number of ships arriving at these ports outside their usual operational window. Congestion, in turn, has resulted in canceled and postponed sailings as ships fail to depart on schedule.
Such delays due to the Red Sea crisis can lead to increased storage and handling costs at congested ports which could ultimately raise prices for freight forwarders and consumers. Additionally, as vessels reroute, distances from ports to inland destinations often increase for freight forwarders. This requires more extensive pre-carriage (transport from the initial loading point to the port) and on-carriage (transport from the final port to the destination), which raises transportation costs but these might not always be fully passed to the clients.
What Freight Forwarders Can Do
One way freight forwarders can mitigate the challenges of turbulent shipping conditions is by entering into block-space agreements. In such arrangements, forwarders and carriers agree on a fixed price for a specific weight or volume of cargo to be shipped in the future. This strategy offers forwarders some capacity and cost certainty and can serve as an effective hedge against fluctuating prices. Moreover, utilizing block-space agreements can yield cost savings compared to current spot rates. This holds particularly for Asia – Northern Europe routes and may offer even greater savings on routes across the Atlantic.
Additionally, European logistics companies can establish agreements with niche regional carriers which often have untapped capacity and are more open to negotiating lower rates or guaranteeing space. These carriers typically operate outside larger shipping alliances which tend to prioritize high-volume clients over smaller forwarders, especially during peak demand periods.
Finally, forwarders can work with cargo insurance providers to establish tailored rate protection products. These financial instruments allow forwarders to hedge against significant price increases by locking in coverage for the difference between a contracted rate and any unforeseen market surge. Some products focus specifically on certain components of the shipping cost, such as bunker fuel surcharges, while others provide broader protection against rate increases.
