- Rates from China to northern Europe quadrupled since December
- Increased tensions a risk for oil markets
Prices for transporting containers from east Asia to northern Europe have quadrupled since December but are likely to ease even if there’s no swift resolution to the current conflict in the Middle East. Restrictions could push up oil and gas prices, however, given the hike in costs and greater difficulty of getting ships through the Suez Canal.
Spot rates for shipping a 40ft container from China to Northern Europe have risen from $1,200 (£948) at the beginning of December to $5,500 as of the end of last week, while rates from China to the Mediterranean have increased from $1,670 to just below $6,500, according to data provider Freightos.
Although some container shipping line companies are still making the treacherous journey through the Red Sea corridor where vessels have been attacked by Houthi rebels based in Yemen, onward journeys through the Suez Canal are down by 74 per cent year on year, shipping consultancy Drewry said.
Global container line capacity has declined by 9 per cent as a result of the attacks, as 30 per cent of vessels use the trade route, and their diversion around southern Africa’s Cape of Good Hope takes 30 per cent longer, Drewry’s head of research Simon Heaney said.
The diversions mean that even shippers that had already agreed contracted rates for the year are being affected, with carriers adding surcharges or telling clients that existing agreements are no longer valid.
Short-term demand drivers are also inflating rates, as shippers try to get goods onto vessels ahead of the Lunar New Year holidays in early February when many Chinese factories close.
Drewry's base case is for the current disruption to run for at least six months, but with a record amount of new container vessels (more than 130 new ships capable of carrying at least 10,000 20ft-equivalent containers) due for delivery this year, effective capacity is still set to increase by around 5 per cent, compared with a previous estimate of 9 per cent.
That slowdown may be enough to ensure that container lines don't lose money this year. Recent upgrades mean analysts expect industry giants Maersk (DK:MAERSK.B) and Hapag-Lloyd (DE:HLAG) to eke out a profit, although consensus forecasts are for earnings to be 90 per cent lower than last year. Their shares have rallied as a result, with the former’s up nearly 30 per cent since early November and the latter’s increasing by 40 per cent since mid-December.
“The shipping companies are licking their lips,” said Michael Field, an equity analyst at Morningstar. “It couldn’t have come at a better time for them.”
Consultancy Oxford Economics had argued that if the Red Sea were to remain closed to container lines for several months and freight costs elevated, this could add 0.7 percentage points to the UK inflation rate by the end of the year. Heaney from Drewry argued that although rates are likely to remain elevated for the duration of the conflict, “they won't go so high as to stoke inflation”, given relatively subdued demand and the increased supply of ships. Of greater concern should be the potential for a dramatic increase in oil prices if the conflict escalates, he added.
Brent crude futures are currently only 6 per cent higher than December’s average price and are likely to remain subdued unless the conflict spreads and disrupts supplies in the nearby Strait of Hormuz, said Henning Gloystein, Eurasia Group’s director of energy, climate and resources.
Around 30 per cent of global seaborne crude is transited through the strait and there is “no easy way to re-route barrels”, analysts at RBC Capital Markets said. It is the main route used by major Middle Eastern producers to supply customers in Asia. Europe gets just over 10 per cent of its gas from the Middle East, although storage levels are high enough to insulate the continent from disruption for some time.
