A freightful time for container ships

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Today in notable charts:

That’s London consultancy Drewry’s index tracking the cost of container shipping worldwide. It’s up more than 60 per cent this week, as readers can see, thanks to continued Houthi attacks in the Red Sea and ongoing diversions of container ships.

The regional pressures become obvious in the underlying data: The cost of shipping containers from Shanghai to Europe (Rotterdam or Genoa) has more than doubled, according to Drewry. Container-shipping costs from Shanghai to New York or Los Angeles are up closer to 30 per cent.

It could be worse. Some spot rates cited on Maersk’s website have more than tripled since October, JPMorgan said in a note this week. Most large Maersk customers won’t face that price increase outright since their rates are decided in contracts, the analysts wrote, but smaller customers are exposed.

And the new (old) route around Africa is nevertheless adding 10 days to containerships’ journeys:

Carriers re-routing ships around Africa indicates that a quick fix is considered unlikely (otherwise they would wait in the Red Sea) and indeed disruption has now been ongoing for over a month.

Thursday’s detonation of an unmanned one-way surface vessel by Houthi rebels, described by mainFT as “a defiant escalation”, doesn’t engender confidence that the conflict is nearing an end.

Or as RaboResearch wrote in a note last month:

Welcome to how the world used to work before British, then US, naval supremacy. This is what a multipolar world is going to look like, if we see one.

So what does it mean for the economy?

Well, first of all, spot rates don’t make as big of a difference for inflation as some might fear. Large retailers usually lock in freight costs ahead of time, and hedge their exposure as well. But JPMorgan adds two caveats.

First, when rates dropped sharply, freight partners did in some cases renegotiate contracted rates down, meaning that upward renegotiations could be possible in the current scenario (carriers may ask for disruption surcharges for example). Second, many container shipping customers (including retailers) agree 12 months contracted rates on Asia-Europe, with many these renegotiated on a calendar year basis. We understand that some customers were previously delaying agreeing new contracts as spot rates weakened.

In other words, the immediate impact on inflation and retailers’ margins should be small. But “bargaining power on contract negotiations has now firmly moved in favour of carriers,” the analysts wrote, and cost pressures will increase if/as the conflict drags on.

Oh, and the Red Sea and Suez Canal aren’t the only pain points for container shipping! A severe drought in the Panama Canal also delayed shipping and raised freight costs late last year.

Analysts at Bank of America gamed out the doomsday scenario in December. They looked at the possible consequences if both the Panama and Suez Canals become impassable. The two passages handle 8 per cent and 28 per cent of global container volumes, respectively:

The Panama Canal and Suez Canal, key chokepoints for global trade, are causing delays, diversions, and higher freight rates. Drought has cut Panama Canal transits, while rocket attacks recently drove Maersk and others to pause Red Sea transits. Our Shipping Equity Research team pointed out that these bottlenecks will impact container trade most, with 8.1% of global container volume traversing the Panama Canal and 28% flowing through the Suez. A closure of these key thoroughfares would boost container demand by 1.5% and 7% respectively. For tankers and bulkers, the closure of the Suez Canal would add roughly 30% to transit distances and boost fleet demand between 1-2%, according to their estimates. Longer supply lines tie up more vessels, boost freight rates, widen origin-destination spreads, and lift bunker demand. Furthermore, a worsening supply chain may be bullish goods demand as companies over-order to ensure adequate inventories.

In other words, supply-chain disruptions are BACK IN for 2024. JPMorgan’s economists said rising freight costs could help keep global core inflation “near 3%, which won’t resolve the immaculate disinflation debate”. It was fun while it lasted though.