The Houthi militia’s attacks on ships in the Red Sea last year sent shockwaves through the global shipping industry, causing a surge in shipping costs by over 300% and raising concerns about potential supply chain disruptions. However, recent developments suggest the industry is on track for a quicker-than-expected recovery.
A Fleet Boom Counters the Disruption:
One key factor driving optimism is a significant influx of new container ships, ordered two to three years ago, entering service. These vessels will help offset the longer travel distances caused by the detour around Africa’s southern tip, a route chosen by many ships to avoid the Red Sea. This surge in capacity was a response to the extraordinary increase in global trade during the pandemic and is expected to help maintain regular shipping schedules.
Analysts Predict Cost Reductions Later This Year:
While shipping costs remain elevated, analysts anticipate the robust supply of new ships to drive down rates later in 2024. Before the Houthi attacks, ships traversing the Red Sea and the Suez Canal (handling roughly 30% of global container traffic) reached European ports efficiently. Now, the longer journeys around the Cape of Good Hope add 20-30% more time, increasing fuel and crew costs.
The Industry Adapting to the New Normal:
Despite concerns about higher consumer product costs, shipping executives believe their operations will adapt to the Red Sea disruption by the third quarter, which is typically the busiest season due to holiday stocking. This adaptation is facilitated by the influx of new vessels, which are expected to constitute over a third of the industry’s pre-boom capacity by year-end.
Giants Like Maersk Lead the Capacity Expansion:
Companies like Maersk, the Danish shipping giant, are expected to see a 9% increase in capacity thanks to new vessels. Others like MSC and CMA CGM are also expanding their fleets significantly, with projections of 39% and 24% increases in capacity, respectively.
Comparison to 2021-2022:
This relatively swift adjustment reflects the improved state of global supply chains compared to 2021-2022. Back then, supply chain disruptions were exacerbated by strong consumer demand for various goods and labor shortages affecting ports and shipping companies.
Not All Ships Take the Long Route:
It’s important to note that not all ships are bypassing the Red Sea and Suez Canal. Data shows an average of 30 cargo ships traversing the canal daily this year, compared to 48 in 2023.
Small Businesses Feeling the Pinch:
While the overall industry adjusts, smaller businesses relying on spot market contracts for container shipping are facing significant difficulties. These contracts set rates significantly higher than pre-attack levels, impacting their bottom line.
Overall, while the Houthi attacks caused a significant disruption, the influx of new ships and the industry’s adaptability suggest a potential recovery by the end of the year. However, the situation continues to be monitored by regulators, and the impact on smaller businesses remains a concern.
