In the past few weeks, ships passing through the Red Sea have been attacked by the Houthis in Yemen, prompting shipping companies to change routes and bypass the Cape of Good Hope in South Africa. This has caused shipping costs to soar. According to reports, shipping charges for each 40-foot container (FEU) have risen to a maximum of 10,000 US dollars, and goods worth more than 200 billion US dollars have already avoided the Red Sea route.

Some market observers expect that the interruption of the Red Sea route may “reinvigorate” the shipping industry, which fell into recession last year. Alan Baer, CEO of logistics company OL USA, said, “Higher shipping rates in 2024 could increase VOCC (Public Carrier for Ship Operation) by several billion dollars, even if this (Red Sea route disruption) lasts only two to three weeks.” He added that if the Red Sea route is interrupted for three to six months, VOCC's profit will once again approach 2022 levels.

1. Weak performance of the shipping industry in 2023

Dragged down by high inventories and falling consumer spending, the global shipping industry remained sluggish in 2023, causing several shipping companies to go bankrupt last year. Prior to the Red Sea attack, global container freight rates had dropped by more than half compared to 2022, in stark contrast to the post-pandemic boom.

According to a recent research report by investment bank Jefferies, the average freight rate for the Asia-Europe route in 2023 was about 1,550 US dollars/FEU, but now it has more than doubled to more than 3,500 US dollars/FEU.

Paul Brashier, vice president of transportation and multimodal transport at ITS Logistics, said: “When we were in November of last year, we saw that shipping rates were at the bottom.” He pointed out that extremely low rates at the time not only appeared in shipping, but also affected truck transportation.

According to the “John McCown Container Report” (John McCown Container Report) data compiled by the industry, container shipping companies earned a total profit of 364 billion US dollars in 2021 and 2022. Compared with the cumulative loss of 8.5 billion US dollars from 2016 to 2019, this figure is astonishing. However, container shipping companies' profits in the third quarter of 2023 plummeted 95.6% year over year to US$2.6 billion.

While recent spikes in freight rates may not help shipping companies relive their post-pandemic glory days, it will help them significantly increase their profitability. Dutch International Group senior economist Nico Luman said last week that according to current freight rates last week, the profitability of container shipping companies is expected to recover in the first quarter.

Furthermore, Jeffrey pointed out that since ships avoided Red Sea routes “leading to increased ship utilization, increased capacity, and tighter balance between supply and demand,” the bank has greatly raised its profit forecast for some shipping giants in 2024. The bank raised Maersk's profit before interest, tax, depreciation and amortization (EBITDA) forecast by 57% to US$9.3 billion; raised Hapag Lloyd's (Hapag Lloyd) EBITDA forecast for 2024 by more than 80% to US$4.3 billion; and will use Starship (ZIM) to raise the 2024 EBITDA forecast by 50% to US$900 million.

Paul Brashier said: “We expect the decline in the shipping industry to end this year, probably at the end of the third quarter.”

2. Will the high shipping costs last longer?

As the US and Britain launch attacks on the Houthis in Yemen, and Yemen's Houthis vow to respond, tension in the Red Sea continues to rise, and shipping costs are likely to remain high. Paul Brashier notes that both shipping carriers' contract rates and spot market rates are likely to rise further.

According to reports, the contract rates currently being negotiated are usually implemented from January to March every year and locked in for the rest of the calendar year. Paul Brashier said that the upcoming Chinese Lunar New Year could also lead to higher shipping rates as businesses try to export more goods before the holidays arrive.

However, some industry observers believe that it is still too early to make clear predictions. Amrit Singh, chief shipping analyst at LSEG, said that although higher shipping rates are expected to help shipping companies profit to a certain extent, this is largely dependent on how long the Red Sea route disruptions last. Amrit Singh said, “The participation of multinational navies, including the US Navy, may prevent further attacks on ships by the Yemeni Houthis, leading to adjustments in shipping rates.”

Furthermore, the problem of oversupply of container shipping is also worth paying attention to. After the outbreak of the pandemic, container shipping companies made record profits and began buying ships in droves, many of which were put into use in 2023, leading to an oversupply in the container shipping market. “Overall, container shipping companies are still struggling to cope with the problem of oversupply,” said Daejin Lee, head of global research at Fertistream.

Rahul Kapoor, global head of global shipping analysis and research at S&P, pointed out that shipping demand is still weak, and recent developments in the Red Sea situation are helping shipping companies absorb some of the excess capacity. He said, “This is worse than ever before, but not as bad as during the pandemic. What we have seen during the pandemic is a global chaos in the shipping industry.”

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