Red Sea Tensions Drive Chinese Exporters To Seek Alternatives In Rail

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  • Recent hostilities in the Red Sea, marked by U.S. and British strikes on Houthi targets in Yemen, have raised new concerns about the impact on container shipping.
  • As shippers explore alternative routes amid the crisis, questions loom over the future of container shipping in the region.

Key Developments and Impact on Container Shipping

The strikes, conducted on Saturday, have prompted threats from Houthi leaders and warnings from Jake Sullivan, National Security Advisor to President Joe Biden, about potential responses from Iran.

Prior to the attacks, around 28% of container ship volumes passed through the Suez Canal, according to Bank of America’s analysis. However, after the attacks, these volumes have experienced a sharp decline, down by 90%.

China-Europe Rates and Shifting Dynamics

Container shipping fundamentals have tightened as trade diverts from the Red Sea. Chinese exporters are opting for alternatives, with some choosing land transportation along the China-Europe Railway Express to avoid lengthy and costly reroutes around Africa’s Cape of Good Hope.

Taiwanese logistics provider Dimerco reported a notable 30% increase in rail volumes in January compared to the same period last year. The shift to intermodal transport along this rail network, offering comparable costs to elevated ocean spot rates, is proving significant amid the geopolitical uncertainties.

Post-Lunar New Year Outlook and Market Adjustments

The recent surge in container rates from China was, in part, due to the rush in exports ahead of Lunar New Year celebrations. With the holiday period ongoing, manufacturing plants and port facilities are expected to resume operations post-holiday. Analysts anticipate that markets will gradually adjust to the current geopolitical landscape.

Some industry experts, such as Lars Jensen, CEO of consultancy Vespucci Maritime, suggest that the Lunar New Year lull will provide a backdrop for normalizing operations in the new round-Africa setup.

Long-Term Impact and Industry Dynamics

Despite expectations of post-holiday adjustments, concerns persist about the enduring impact of Red Sea disruptions on the profitability of container shipping companies. Jefferies analyst Omar Nokta notes a rise in capacity utilization among container ships, from 78% before the Red Sea crisis to 87%, giving liners more pricing power.

In the United States, West Coast ports are experiencing significant growth compared to their East Coast counterparts. Factors such as ongoing disruptions in the Panama Canal, Red Sea turmoil, and increased focus on supply chain resilience contribute to the West Coast’s regained appeal.

Bookings at the Port of Los Angeles and Port of Long Beach have surged, with a 144% and 106% rise, respectively, over the past year. This trend is expected to continue, impacting the balance of trade routes and shaping industry dynamics well into 2024.

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Source: Freight Waves

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