The Red Sea crisis has intensified capacity constraints, and shipping market prices have soared.

Damo pointed out in a report on the 24th that due to the Red Sea crisis interfered with the capacity of the shipping market, there was a shortage of capacity on European routes. Combined with newly delivered ships, the shortage of capacity could not completely make up for the shortage of capacity, and shipping prices were soaring.

From the end of March to May 17 this year, the Shanghai Export Container Freight Index (SCFI) rose 46% cumulatively. Among them, freight rates for European and Mediterranean routes increased by 53% and 32% respectively, while freight rates for US West and Eastern US routes increased by 47% and 36% respectively.

Damo said that the short-term rebound in freight rates is likely to be strong and may continue for 1-2 quarters. The Red Sea disturbance only delayed the arrival of a downward cycle in the shipping industry.

Prices in the shipping market have soared, and the Red Sea crisis has become a key factor

The strong recovery of the shipping market is inseparable from the impact of the Red Sea route disruptions. Damo pointed out:

Currently, the number of container ships transiting through the Suez Canal has been reduced by about 90% compared to December last year, and most of the ships have been diverted to the Cape of Good Hope route, which is longer.

This rerouting has affected about 30% of global container trade, leading to an increase of about 30% of the transport distance of the relevant routes. In other words, if Red Sea disturbance continues, it will consume an additional 9-10% of global container shipping capacity.

Is the Red Sea turmoil having a short-term impact on the shipping industry, or is it a structural one?

Dama believed earlier that the rebound in the shipping market caused by the Red Sea turmoil would not last long because:

In terms of capacity, the total TEU capacity of the container fleet has now increased by 17% compared to the end of 2021, with an annual growth rate of about 7%;

From a supply chain perspective, the global supply chain was recovered after the epidemic ended, and port congestion was significantly reduced;

Furthermore, the speed of container ships is expected to increase after the epidemic. According to our analysis, ship speed is usually positively correlated with shipping spot prices, so we think ships can speed up again to reduce capacity losses due to detours.

However, Damo soon discovered that there was a deviation between this judgment and the actual situation. Because of the shortage of capacity caused by the interruption of the Red Sea route, it is likely that there is a structural shortage.

Damo pointed out that currently from the supply-side perspective:

1. Currently, the capacity of newly delivered ships cannot meet the needs of all routes. Ships with a capacity of more than 8,000 TEU increased by only 21% compared to the end of 2021, which cannot make up for 30% of the capacity lost on European routes due to route adjustments.

2. Due to carbon emission reduction requirements, some newly delivered ships are unable to speed up effectively.

Finally, European ports have begun to experience congestion again.

And from the demand side:

1. Due to extended route transportation distances, this year's peak shipping season arrived earlier than expected;

2. Demand for inventory replenishment in the US is stronger than expected, and there is also a shortage of capacity on American routes; - Potential impact of diversification of global supply chains:

3. The increase in trade volume between China and emerging markets such as South America and Africa has boosted the increase in cargo volume on related routes.

The downward cycle of the shipping industry will come after all. Red Sea disturbances have only delayed the arrival of the downward cycle

The strong short-term performance of the shipping market exceeded Damo's previous expectations. Although both supply and demand sides temporarily supported this round of shipping rebound, Damo is still not optimistic about the shipping industry in the long term because the fundamentals of the shipping industry are different from the upward cycle during the pandemic:

1) From 2022 to April 2024, capacity increased by 17%;

2) Now that the supply chain is restored, the possibility of simultaneous congestion in global ports is very low;

3) We believe that new capacity will be increased by 8-9% every year between 2024-2025;

Damo said that the short-term rebound in freight rates is likely to be strong and may continue for 1-2 quarters. The Red Sea disturbance only delayed the arrival of a downward cycle in the shipping industry.

If the Red Sea disturbance disappears, the shipping industry will soon return to a downward cycle; if the Red Sea disturbance continues, the downward cycle is likely to arrive within the next 2-4 quarters.

Finally, Malaysia also mentioned the potential impact of global economic growth and trade changes on shipping:

Generally speaking, the growth in global trade demand is roughly in line with the increase in global GDP, with an overall growth rate of 3-4%. Considering supply chain diversification, such as China shifting production capacity overseas or shifting low-end production to other emerging markets, global trade growth may be higher than global GDP growth, but we think it is unlikely that global trade will grow at a compound annual rate of more than 5-6%.

Damo expects global economic growth to remain stable in 2024-25, with China's export growth rates of 8% and 6% in 2024 and 2025 respectively. This also means that the shipping industry is affected and may experience a short upward cycle in 2024-25. Once Red Sea disturbances disappear, the container shipping industry will return to a cyclical slump.

edit/new