The recent ceasefire agreement between Israel and Hamas has raised hopes for the resumption of normal shipping operations in the Red Sea. However, this period of uncertainty highlights key questions for shippers, according to Xeneta.
Return To Red Sea
The recent ceasefire agreement in the region does not automatically guarantee a significant increase in container ship traffic through the Red Sea.
While the ceasefire is a positive development, achieving a lasting peace agreement will require ongoing efforts. Shipping companies will demand assurances of long-term safety for their crews and vessels before resuming normal operations in the region. Although diversions around the Cape of Good Hope are costly and undesirable, the current stability in the region was achieved after significant disruption. Shipping companies are understandably cautious about returning to the Red Sea immediately, fearing a potential return to instability.
Are Carriers Prepared?
Shipping carriers have prepared two service plans for 2025: one using the traditional Cape of Good Hope route and another utilizing the Red Sea. The transition to the Red Sea route will be gradual, starting with smaller vessels and gradually increasing ship size. Due to the intricate nature of shipping networks, it may take 1-2 months to fully resume normal operations through the Red Sea.
What Will Happen?
A sudden return of ships to the Red Sea will likely cause immediate disruptions. Considering that typical sailing times for routes like Shanghai to New York are 30-40 days, adjusting schedules to accommodate the renewed Red Sea traffic will take time. This could lead to a situation where ships arrive at ports much earlier or later than anticipated.
The arrival of a large number of ships at ports simultaneously could cause severe congestion and delays, creating ripple effects across global ocean supply chains. The impact of the Red Sea crisis on shipping was not immediate. It took more than six months for the full force of congestion to hit, leading to a 426% increase in spot rates on the Far East to North Europe trade in July.
What About Freight Rates?
The return of ships to the Red Sea will likely cause significant disruption to schedules, leading to extreme volatility in spot rates with a strong downward trend.
The extent of this disruption will depend heavily on carriers’ capacity management strategies. A large-scale return to the Red Sea would reduce global average sailing distances, impacting TEU-mile demand.
Despite a forecasted 3% growth in global volumes, TEU-mile demand could decline by 11% in 2025 if there is a significant shift back to Red Sea routes. This increased capacity, combined with record deliveries of new ships, will flood the market. Carriers will need to remove around 1.8 million TEU from the market to maintain current market conditions.
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Source: Xeneta
