On 21 November 2023, Yemeni Houthis launched attacks on commercial shipping sailing across the Red Sea in retaliation for Israel’s invasion of the Gaza Strip, causing a major disruption in world trade.
The attacks by drones and missiles on merchant vessels have seen shipping costs and cargo delivery times skyrocket, putting the margins of exporters under severe pressure. The severity of the problem is being felt by those whose contracts also include costs of delivering goods at buyers’ ports.
The Baltic Index, which tracks global shipping costs, has soared by 85% between 29 December 2023 and 4 January. Apart from basic shipping costs, the risk and peak season surcharges have also increased. Although the total cost of shipping varies from route to route, in some places it has increased fivefold.
Several of the world’s largest shipping firms – including Maersk and Hapag-Lloyd – have the vessels scheduled to transit the Red Sea ‘paused’ until further notice, while the ships of the Mediterranean Shipping Company (MSC) are transiting the Red Sea to reroute around southern Africa.
According to US-based think tank Council on Foreign Relations, avoiding the Red Sea means abandoning one of the most common global shipping routes from Asia to Europe. Indeed, 40% of Asia-Europe trade normally transits the sea. Ships shunning the Red Sea will have to instead sail around the Horn of Africa, which can cost $ 1 million more per round trip in additional fuel costs.
Still, more than 150 commercial ships have chosen the longer route since November. On the other hand, insurance premiums for ships using the Red Sea have shot up nearly tenfold since the attacks began.
Reduction in vessels crossing the Red Sea
In response to an email query by The Sunday Morning, Veson Nautical, a US company providing maritime freight management solutions, said that the number of containers that had passed through the Bab el-Mandeb Strait of the Red Sea in the first seven days of 2024 was down by 71.09% compared to the same period in 2023 (down to 37 from 128 vessels), with the total capacity of those vessels falling by 90.88% (1,156,346 TEU to 105,411 TEU). It said that larger vessels appeared to be avoiding the area so far in 2024.
In the first week of 2023, 20 Ultra Large Container Vessels (ULCVs) passed through the Bab el-Mandeb Strait, while no vessels had done so in the first week of 2024. The average TEU capacity of each container vessel passing the strait went from 9,034 TEU to 2,849 TEU.
“When we compare the first seven days of 2024 vs. the first seven days of 2023 for tankers passing the Bab el-Mandeb Strait, the number of vessels reduced by 35.33% (167 to 108), with capacity falling by 29.28% (16,044,900 deadweight tonnage to 11,347,500 deadweight tonnage),” Veson Nautical said.
In December 2023, Bloomberg Economics said that Sri Lanka was among the economies that would face higher shipping costs and delays in delivery due to the rerouting of shipping vessels around Africa following the Red Sea attacks.
It said that attacks in the Red Sea linked to the Israel-Hamas war would cause shipping delays and drive up the price of goods, bringing a new inflation risk, with economies such as Greece, Jordan, Sri Lanka, and Bulgaria being affected.
With the rerouting of ships through South Africa, concerns have been raised as to whether the Colombo Port will lose its transhipment business, given that shipping lines will bypass Colombo.
Too early to say
Speaking to The Sunday Morning, Shippers’ Academy Colombo CEO Rohan Masakorala said that it was too early to say whether the shipping lines would bypass Colombo due to the rerouting via the Cape of Good Hope.
However, he added that there would definitely be readjustments in shipping schedules should the Red Sea attacks continue, while there could also be adjustments in frequencies, since ships were held back in the waters for an additional 21 days for a round trip.
He said that at present, nearly 80% of container ships were passing through the Cape of Good Hope.
Masakorala noted that in response to the situation, some may even use the Colombo Port in the short term to discharge cargo, which would result in a short-term increase in transhipment volumes at the port. “Since the Colombo Port is a hub, some ships may discharge goods at the hubs so that they can connect to various feeder vessels,” he said.
Moreover, he said that the shipping lines would realign their plans if the attacks continued, which would impact transit time to reach the market. “There will definitely be a cost implication, which can already be seen in the spot rates,” he said, adding that even the contracted rates could be amended very soon.
“Moving forward, this is going to be a serious problem if it is not controlled at the outset,” Masakorala said.
Surge in transhipments at C’bo Port
Speaking to The Sunday Morning, Sri Lanka Ports Authority (SLPA) Chairman Keith D. Bernard said that there had been a 25% increase in transhipment volumes in the first two weeks of January due to the Red Sea crisis, adding that the sudden surge in the volumes was temporary.
However, he said that the increase in the transhipment volumes would nevertheless continue at the Colombo Port due to the continuous development at the port that is expected through the expansion of the East Container Terminal (ECT) and the West Container Terminal (WCT) by end 2024 and early 2025.
“Hopefully, with the situation we have, we should be able to attract and retain such volumes in the future also,” he added.
However, he said that the authorities could not be certain whether this surge would continue since shipping lines were engaging in current transhipments at a higher cost by taking a longer route and dropping the volumes in Colombo.
Will exporters face huge shipping bills?
Masakorala said freight charges could increase further if the supply chain was continuously affected and if the impact were to spread to other supply chains – which was likely to happen since the number of vessels deployed on the route would be lower, given that they will be at sea for an extra 21 days for the round trip.
However, in the case of exporters, he said that it would depend on the contract between the buyer and the seller. He added that in some cases the exporter may have to absorb the freight charges while in some cases it would be shared among the two parties.
For example, he pointed out that in the apparel industry, the freight charges were always paid by the buyers. “However, all this will have a medium-term impact on the consumer,” Masakorala said.
Meanwhile, Sri Lanka Shippers’ Council Chairman Sean Van Dort told The Sunday Morning that shipping lines had increased freight charges by 300% between December and January due to the Red Sea attacks, which cost could not be borne by the exporters.
“Exporters cannot bear such rates and will have to close down businesses in Sri Lanka if this continues,” he warned.
He said since buyers would not increase their payments to make up for the increase in freight charges, exporters would have to bear the cost alone.
Importers to face issues if conflict drags on
Speaking to The Sunday Morning, Ceylon Chamber of Commerce Import Section Vice Chairman Ushan de Silva said that the repercussions of the Red Sea attacks would have an impact on the importers in the long run as the attacks mainly impacted cargo coming in from Europe.
He said that the issue would impact local exporters in the short run as most of Sri Lanka’s exports went to Europe. He noted that there would also be an impact on lead times, which would increase by two to three weeks. “The schedule reliability given by the shipping lines will be really low now due to the situation, which will have a direct impact on the supply chain,” he added.
To address the problem, de Silva said that the importers would have to plan ahead on the inbound cargo, taking into account the anticipated delays.
However, he did not anticipate a significant impact on import volumes due to the delays or an increase in freight charges as most of the imports were coming from India, China, and other countries in the region.
Moreover, he said that since most of the import restrictions had been removed, unlike during the pandemic when the freight rates were at their highest, traders who imported finished goods would see a direct cost impact, which would be passed on to consumers in the local market.
Rates unlikely to reach pandemic levels
De Silva said that it was unlikely that the rates would reach pandemic levels at this point, given the shrinking of volumes in world trade with demand dropping. He noted that even domestically, there had been a reduction in volumes with consumption decreasing.
The shipping container shortage in 2021 and 2022 due to the record-high demand for containers saw the rate of a 40 ft container peaking at $ 12,000.
Despite the relaxation of imports in 2023, domestic cargo handling was 6.1% less on a Year-on-Year basis at the end of November at 894,445 TEUs.
De Silva said that manufacturers importing raw materials would not be as severely impacted as the majority of them exported their products.
Further, he said that it was unlikely that the Red Sea issue would continue for a long time since for a country like Egypt, the Suez Canal was its main source of income.
In the 2022-2023 fiscal year, Egypt earned $ 9.4 billion from Suez Canal fees, up from $ 8 billion the previous year. As it recovered from the Covid-19 pandemic, Suez Canal revenues helped Egypt record an economic growth of 6.6% in 2022. In the first half of 2023, Suez Canal revenue was worth 2% of Egypt’s GDP.
Egypt is also facing an unfavourable balance of payments position that caused annual inflation to reach 34.5% in November 2023, the Egyptian Pound to lose half its value against the US Dollar between March 2022 and October 2023, and foreign currency reserves to dwindle from a relative high of $ 45 billion in 2019 to $ 35 billion by October 2023.
Supply chain disruptions lead to shortages and higher prices
A statement issued by the Ceylon Association of Shipping Agents (CASA) on Thursday (11) said that the recent rise in Houthi rebel attacks on shipping vessels in the Red Sea had created a significant disruption to global maritime trade, with far-reaching consequences.
CASA said that the immediate effect of the attacks such as traffic diversions and soaring shipping costs would push up fuel costs and transit times for shipping lines while impacting industries relying on seaborne trade, from energy to consumer goods.
It said that supply chain disruptions would cause delays and shortages due to the disruption of the flow of essential goods, potentially leading to higher prices and economic slowdown.
“In this backdrop, Sri Lanka will continue to play a vital role with its strategic location advantage, which might lead to an increase in transhipment volumes handled by the Port of Colombo,” the statement by CASA said.
Govt. competency issues in analysing impact
Speaking to The Sunday Morning, Ministry of Ports, Shipping, and Aviation Secretary K.D.S. Ruwanchandra said that there was an issue relating to competency at the ministry when it came to finding data to carry out a detailed analysis on the impact of the Red Sea attacks on Sri Lanka.
However, he said that the ministry was currently looking into the impact with the available data and that the findings would be announced to the public in the coming weeks.