International shipping costs have risen over the past 18 months for many types of products. This contrasts with the decades-long era of declining inflation-adjusted costs. The most recent run-up was influenced by Houthi attacks on ships in the Red Sea, leading most vessels to take the longer Cape of Good Hope route between East Asia and Europe. The Red Sea problem followed low water in the Panama Canal system, which reduced the number of transits and led some ships to longer alternative routes, reports Forbes.
Recent Challenges and Trends
Over the past 18 months, international shipping costs have risen for various products, reversing a trend of declining inflation-adjusted costs. Several factors have contributed to this increase:
- Houthi Attacks: Attacks on ships in the Red Sea have forced many vessels to take longer routes around the Cape of Good Hope.
- Panama Canal Issues: Low water levels in the Panama Canal have reduced the number of transits, leading some ships to opt for alternative, longer routes.
Near-term vs. Long-term Outlook:
- Near-term: The outlook for shipping rates is favorable for shippers.
- Long-term: Rising environmental standards and the aging fleet will necessitate the construction of new, more efficient ships.
Environmental Regulations and Fleet Changes
Shipping expert Sal Mercogliano highlighted several key points:
- Environmental Standards: The International Maritime Organization (IMO) now requires ships to log carbon emissions. Poorly rated vessels will be banned from many ports, particularly in Europe.
- Slow Steaming: Many ships are reducing their speed to lower fuel consumption, a practice known as “slow steaming.” New ships designed for slower speeds are more fuel-efficient than older ships merely cutting speed.
- Dual Fuel Systems: New ships are often equipped with systems allowing them to use alternative fuels like methanol, ammonia, or liquified natural gas, which can be more environmentally friendly.
Impact on Shipping Capacity:
- Increased Capacity Needs: Slower steaming and the scrapping of older vessels mean more ships are needed to maintain current shipping volumes.
- Boom in Ship Orders: The BRS Annual Review reported a 16% increase in ship orders in 2023, with bulk carriers leading the charge. This trend continues into 2024.
Avoiding Overbuilding:
- Under-Scrapping: Mercogliano notes that while ship orders are up, many older ships are still in service due to high rates. This includes older tankers in the “dark fleet” to transport Iranian and Russian crude oil amid ongoing sanctions.
- Specialization: Different types of ships (e.g., container ships, bulk carriers, tankers) are specialized, and a surplus in one type doesn’t alleviate shortages in another.
Key Insight for Business Leaders
Mercogliano emphasizes that small disruptions can have significant impacts due to the lack of slack in the shipping industry. For example, the Suez Canal blockage in 2021 caused supply chain disruptions lasting six months, despite being cleared in six days. He suggests that a resilient “supply web” is needed rather than a linear supply chain to better handle unexpected changes.
This analysis underscores the complexities and challenges facing the shipping industry, highlighting the need for adaptation to environmental regulations and the importance of strategic planning to manage capacity and avoid disruptions.
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Source: Forbes
