By K Raveendran
Shipping rates have already gone up by more than three times in a week after the January 9 attack by Houthis on the Red Sea. But supply chain professionals are warning that the rates are going to further shoot up in the coming weeks. This is bad news for India’s export-import trade, which is already facing a serious crisis due to shipping cost escalations.
The shipping crisis has proved to be a double whammy for Indian exports, who are faced with loss of competitiveness loss on the one hand and logistical nightmares on the other. While exporters struggle to absorb the increases, importers face cost increases for the goods, which affect their final prices.
The container price sentiment Index (xCPSI), a sentiment tool by Container xChange to measure market sentiment for container price development, reached an all-time high as container price anticipation peaks. The index value peaked at 71 in January from an average of 27 in December, mirroring the significant impact Red Sea attacks have had on prices so far. This indicates that the prices are likely to further shoot up in the coming weeks significantly.
The Red Sea, a vital conduit for East-West trade, is undergoing unprecedented turmoil due to persistent attacks by Houthi rebels, causing significant uptick in fuel and insurance costs, longer voyages and capacity soak up for the transportation and logistics sector.
Average rate on China-Europe quoted this week is about US$5400, up from US$1,500, which is three times of what it was just the week before. Latin America, Japan and Korea as well as Europe Mediterranean witnessed the highest increase in container trading spot rates over the last 30 days. Spot rates in Shanghai, Hamburg, Boston indicate the steep increase for boxes in these hotspots
There is a growing demand for containers in Asia as shippers and forwarders foresee cargo demand in the coming weeks, to fulfil orders ahead of the Chinese New Year. A container manufacturer from China reported to xChange that shipping companies are demanding more containers now as they avoid Red Sea. Therefore, Shipping companies and leasing companies have placed more than 750,000 TEU ISO container orders out of China in the last two months.
The two most visible cost components that are leading to higher transport costs resulting from rerouting to Cape of Good hope are insurance and fuel costs. Insurance for cargo transiting Red Sea has become challenging. On top of it, insurance costs have surged in anticipation of the difficulties and challenges that do not seem to taper off. Another element is the fuel cost which has increased roughly by 20-23 percent by way of travelling through the Cape of Good Hope, as compared to the traditional Suez Canal route.
The bulk, oil and gas sector have so far witnessed no impact as the vessels carrying these continue to operate on the Red Sea. There has been no attack on these vessel types. High value container vessels are being diverted, impacting the big east-west trade from Europe to Asia and vice versa.
The Red Sea, with its strategic importance accentuated by the Suez Canal, serves as a crucial superhighway connecting Europe, Asia, and Africa. Recent attacks have escalated operational costs, creating significant challenges for shipping industries and placing downward pressure on profits. The Bab el Mandeb strait, also known as the Gate of Grief, has become a focal point, and its geographical challenges make it a critical chokepoint for maritime traffic. The disruption is not only impacting the flow of goods but also leading to a substantial re-routing of vessels, resulting in increased shipping costs, longer voyages, and environmental concerns.
Vessels are diverting around the Cape of Good Hope, leading to increased fuel costs, environmental concerns, and impacts on shipping efficiency. War risk premiums for shipping have also surged, impacting transportation costs and potentially leading vessels to seek alternative routes. The Red Sea crisis has spotlighted broader issues of supply chain disruptions, requiring strategic planning and forecasting by companies to navigate challenges.
As the Red Sea crisis unfolds, the global shipping industry faces unprecedented challenges, necessitating collaborative efforts and strategic solutions to ensure the resilience of supply chains and mitigate the far-reaching impacts on international trade. (IPA Service)
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