Red Sea troubles could end shipping recession as freight rates spike

The Maersk Sentosa container ship sails southbound to exit the Suez Canal in Suez, Egypt, on Thursday, Dec. 21, 2023.

Stringer | Bloomberg | Getty Images

Vessels transiting the Red Sea have faced attacks over the past several weeks from Yemen-based Houthis, prompting shipping companies to change routes, leading to a spike in freight rates.

Embarking on longer detours around the Cape of Good Hope in South Africa have pushed ocean freight rates by up to $10,000 per 40-foot container, as container ships have diverted more than $200 billion of goods away from the Red Sea waterway to avoid strikes by Houthi militants.

U.S.-owned commercial vessel, the Gibraltar Eagle, was struck by Houthi militants on Monday, the U.S. Central Command said.

Some market watchers expect the disruptions could bring about a reversal in fortunes of an industry that was mired in a recession last year.

“As to the higher rates in 2024, this could add multiple billions to the bottom line of the VOCC even if this lasts for just another two or three weeks,” Alan Baer, CEO of logistics company OL USA, told CNBC in an email. 

If this goes on for three to six months the [profits] will again slowly approach 2022 levels.

Vessel-Operating Common Carriers (VOCC) are ocean carriers that own and operate vessels responsible for managing cargo and transporting them. Maersk, Evergreen and COSCO are some prominent VOCCs.

“If this goes on for three to six months the [profits] will again slowly approach 2022 levels as the operating expenses should be lower than what the carriers experienced during the 2021 and 2022 chaos,” Baer said.

Shipping slump of 2023

The global shipping industry has been in a slump, dragged down by high inventories and consumer spending pullback which led to several bankruptcies last year. Before the Red Sea attacks, global shipping container rates had more than halved from 2022, a stark reversal from the boom following the pandemic.

Asia-Europe rates averaged around $1,550/FEU in 2023, but have now more than doubled to over $3,500/FEU, a recent Jefferies research note said. FEU is a standard unit for measuring for a 40-foot shipping container capacity, which is usually the largest standard size for container vessels.

“When we were in November, we pretty much saw the bottom … the rates were just bottom of the barrel,” said Paul Brashier, vice president of drayage and intermodal at ITS Logistics. He noted that the abysmal rates extended to not just shipping but also trucking. This was not always the case.

Container shipping companies earned profits of $364 billion in 2021 and 2022 combined, according to data from the John McCown Container Report, an industry compendium, which are jaw-dropping when compared with the cumulative loss of $8.5 billion that the industry saw from 2016 to 2019.

But the industry’s net income plunged 95.6% year on year to $2.6 billion in the third quarter of 2023.

Containers are piled up in Lisbon, Portugal, on January 13, 2024.

Luis Boza/ | Nurphoto | Getty Images

While the recent spikes in freight rates might not help shippers relive their glory days following the pandemic, they would substantially boost profitability.

Container liner profitability is expected to recover in the first quarter of 2023 with the current price hikes, ING’s Senior Economist Nico Luman said in a report last week.

Additionally, brokerage Jefferies said it has “raised significantly” the 2024 earnings forecasts for some shipping giants on the back of “higher utilization, higher capacity and a tighter supply/demand balance as a result of vessel re-routing away from the Red Sea.”

The brokerage has lifted Maersk’s 2024 EBITDA forecast by 57% to $9.3 billion, Hapag Lloyd’s by over 80% to $4.3 billion, and raised ZIM’s by 50% to $0.9 billion.  

“We are forecasting the freight recession coming to an end this year, more than likely late third quarter,” said ITS Logistics’ Brashier.

Higher rates for longer?

Overall, container freight will still [find it] difficult to manage oversupply issue.

Daejin Lee

Global Head of Research at Fertistream

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