Sunday, 2024 July 21

Red Sea crisis: Shipping costs skyrocket, dealing setback to cross-border sellers

As global supply chains continue to be disrupted by the ongoing Red Sea shipping crisis, shipping costs have little room to move but upward, and they are skyrocketing. This has forced major shipping companies to increase their prices across multiple routes to navigate accordingly.

As of May 31, data from the Shanghai Shipping Exchange shows that the Shanghai Containerized Freight Index (SCFI), which reflects actual shipping rates, has been rising for eight consecutive weeks and counting, increasing over 50% in the past month.

Data source: Shanghai Shipping Exchange. The displayed values are estimates and are provided solely for reference purposes.

Typically, May and June are off-peak seasons for the shipping industry. Last year, the Xeneta Shipping Index (XSI), which tracks long-term shipping rates, recorded the largest drop in container shipping rates in history, a decline of 27.5%, leading to container congestion at ports.

However, this year is different. According to CCTV, there is a significant shortage of containers at ports, forcing some companies to purchase their own containers to address the shortage. This bodes badly for the industry, as container shortages typically mean increases in logistics costs and transportation times, thereby disrupting the supply chain. These costs could eventually be passed on to consumers.

For cross-border e-commerce sellers, sea freight is a more mainstream and economical choice compared to air freight. The experience of 2021, when sea freight prices surged, affected numerous cross-border sellers, eroding their profits. Three years later, a supply shortage could culminate in a similar situation. If the Red Sea shipping crisis continues, the problem will become more severe during the peak shipping season.

The cost of avoiding the Red Sea

According to data from Flexport, European shipping routes are expected to remain tight in June, with freight rates likely to continue rising into July. Shipping costs have increased in early June, by around USD 1,000 for a 40-foot container, with another hike expected in late June.

Global shipping giant Maersk has raised its annual profit forecast, stating that congestion in the Red Sea is having a greater-than-expected impact on the global shipping supply chain, further pushing up freight rates.

While shipping companies are making substantial profits, the scheduling of shipping from China and Asia to Europe and the Americas is becoming increasingly chaotic.

The Red Sea is a crucial route through the Suez Canal, a key global shipping artery connecting the Red Sea and the Mediterranean Sea, and serving as an important shipping route between Europe, Asia, and the Middle East.

Due to the escalating situation in the Red Sea, detouring around the Cape of Good Hope has become unavoidable. Container traffic through the Suez Canal has been reduced by about 80% as a result.

In May, Osama Rabie, chairman of the Suez Canal Authority (SCA), said that, since November last year, nearly 3,400 ships have changed their routes to bypass the Cape of Good Hope, adding about 11,000 kilometers to their journey, extending travel time by 12–14 days, and increasing fuel costs by about 40%.

Additionally, after last year’s drought in the Panama Canal restricted navigation, a sizable number of ships opted to travel via the Suez Canal and the Mediterranean Sea to reach the eastern coast of North America.

Flexport’s calculations show that routes connecting Asia to the east coast of the US via the Cape of Good Hope take ten days longer to complete than those through the Panama Canal, and five days longer than those through the Suez Canal. While routes from Asia to the west coast seem unaffected, the longer travel times around the Cape of Good Hope require more ships, forcing shipping companies to allocate more capacity to Asia-Europe routes, thus raising rates for routes between Asia and the west coast of the US.

Indeed, as of May 31, data from the Shanghai Shipping Exchange shows that shipping rates for routes to and fro the west coast have increased by 18.9%, and by 11.2% for those connecting to the east coast, marking the highest month-on-month increase among major routes.

Surging shipping cost from 2022 to 2024. Data Source: Shanghai Shipping Exchange.

Flexport added that carriers expect this wave of price increases to continue in the short term, mainly because ships departing from Asia in May and June are expected to be fully loaded. Routes to the US west coast are already fully booked, and those bridging to the US northwest coast are nearly full from late May to June. Routes from Vietnam, South and East China (Yantian, Shanghai, and Ningbo) to the US west coast are also particularly tight.

To make matters worse, congestion is worsening at the major transshipment hub in Singapore, the world’s second largest container port.

Data shows that the number of containers waiting to dock in Singapore have surged, reaching a peak of 480,600 twenty-foot equivalent units (TEUs) in late May. A S&P Global report indicates that congestion at major Asian ports can drive up container shipping prices.

What’s driving export demand?

Undoubtedly, the peak shipping season has arrived early. In addition to geopolitical factors affecting the balance of supply and demand in shipping and driving up prices, the moderate recovery of the global economy has bolstered demand.

In the first four months of 2024, the total value of China’s import and export goods trade was RMB 13.81 trillion (USD 1.9 trillion), increasing 5.7% year-on-year, hitting a historical high for the same period. Driven by exports, China’s international container throughput at ports has maintained steady growth since 2023, growing 10.3% year-on-year in the first four months, accelerating since the fourth quarter of last year, and leading to a recovery in demand in the international container shipping market.

Notably, the fastest growing region for Chinese exports in the first half of the year was Latin America, directly driving up shipping prices to the region. As of May 17, shipping prices to Latin America had increased by 1.5 times.

Since the beginning of 2024, China’s total exports to Latin America increased by 11.4% year-on-year from January to April. This growth is mainly driven by the markets of Mexico and Brazil, with exports to Mexico growing by 15.1% and to Brazil by 24.6% year-on-year, making Brazil China’s second largest export market in LATAM.

As a result, despite the current shortage of shipping capacity, a bulk of shipping companies are increasing their capacity for shipping from China to Latin America.

In late May, French shipping and logistics company CMA CGM added a new M2X route from China to Mexico, deploying eight container ships each with a capacity of over 4,000 TEUs. Besides CMA CGM, the world’s largest container shipping company MSC and China’s Cosco Shipping also launched new China-Mexico routes in May.

Image courtesy of Ian Taylor.

Another factor is that the US entered a restocking phase last year. According to an analysis by China International Capital Corporation (CICC), from the demand side, US demand for goods gradually increased as interest rates peaked at the end of 2023. Meanwhile, the 18-month-long destocking cycle in the US ended, and industries heavily reliant on exports, such as equipment, furniture, and textiles, showed signs of restocking. US restocking is synchronized with imports, and an increase in US import growth is likely to drive exports from related countries, leading to positive import and export trade.

The scale of China’s cross-border e-commerce also continues to rise. In the first quarter of 2024, the total value of cross-border e-commerce exports reached RMB 448 billion (USD 61.7 billion), growing around 14%.

Due to soaring sea freight prices and booking difficulties, cross-border e-commerce businesses are gravitating toward air freight options to alleviate logistics pressures, even boosting demand for air transport in the Asia Pacific region.

A report by the International Air Transport Association (IATA) noted that air cargo demand in the Asia Pacific grew by 14.0% year-on-year in April, the strongest growth among all regions. The report suggests that the strong growth in air cargo in April might be supported by cross-border e-commerce and the limited global sea shipping capacity.

According to Flexport, the prolonged detour around the Cape of Good Hope may represent the premature commencement of Christmas shipments as early as July.

Currently, there is no sign of easing in the Red Sea shipping crisis, and congestion at Singapore’s ports remains severe. Domestically in China, there is a severe shortage of containers. Affected by shipping issues, cross-border e-commerce businesses have little choice than to adjust their production plans and plan ahead for the end-of-year overseas e-commerce peak season, including product production, marketing, goods turnover time, and payment collection periods.

This situation will test businesses’ ability to anticipate and respond to the North American market in the second half of the year. For cross-border e-commerce companies that previously relied heavily on sea freight, exploring new channels will be necessary, with the China-Europe Railway Express (CRE) and air logistics among the options for consideration.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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