As the insecurity over conflict in West Asia grows, what was once a temporary setback to one of the world’s arterial shipping routes, may now become prolonged. To understand this and other contemporary trends in perspective we must comprehend the full impact of the container shipping trade losing its once safe passage via the Red Sea. It’s a story of conflict, hardship for shippers and profit for container shipping lines.
In the aftermath of the pandemic
According to UNCTAD’s (UN Trade and Development) Handbook of Statistics 2023, 11 billion tons of goods traded in 2021 was moved by sea. As per statista, international sea borne trade carried in containers annually rose from 0.1 billion tons in 1980 to 2.2 billion tons in 2023.
The spike in movement of goods and commodities globally soon after the COVID-19 pandemic’s peak, resulted in very busy logistics networks that pushed up freight rates for a fair period of time and left little capacity idling in the container shipping business.
The period witnessed record profit for container lines. In some cases, annual profit for individual companies were in excess of a billion dollars. Alongside, the world woke up to the centrality of logistics in everyday existence and how developments therein could influence inflation. These years also saw the emergent prominence of container shipping tycoons and giant companies, which then used their new found cash chests to increase fleet size and expand into related businesses.
The ranking of top players in the field experienced churn. Having stayed at the top for several years, Danish company, Maersk, slipped in rankings in terms of overall container carrying capacity. Swiss-based shipping giant, Mediterranean Shipping Company (MSC), has moved to the top spot, while French rival CMA-CGM is now snapping at the heels of Maersk for second place, and has since narrowed the gap.
A more recent example of just how seriously logistics is being viewed currently may be found in the decision of the Taiwanese government to support the container fleet expansion of Taiwanese line, Yang Ming. The line which had been less active in ordering new ships and saw its market ranking in the global top ten lower, will now commission new buildings (including the possibility of ships of 24,000 TEUs-size) to boost its fleet.
Gaza and Houthi make Red Sea risky
Not long after the spike in freight rates (caused by pent-up consumer demand flooding the market) following the pandemic’s peak started to settle down, the conflict in Gaza threatened to render passage through the Suez Canal insecure.
It became a genuinely worrisome reality when the Yemen-based Houthis commenced attacking ships sailing through the Red Sea. As the attacks gathered momentum, major container lines stopped their voyages to Europe from Asia via the Red Sea and the Suez Canal and instead, dispatched their ships around Africa’s Cape of Good Hope.
This was a longer route. Besides impact on freight rates, the longer voyage time meant more ships drawn into the work of transporting containers. Two other developments serve as motif for this setting of altered sailing route as well as the general demand for ships (for replacement as well as fresh addition). There are container ports in Spain and Morocco, which have assumed importance as transshipment terminals for cargo destinations in the Mediterranean region. Second, although not comparable to the ship building boom of the late 2000s, reports in July 2024, spoke of shipyards across China increasing capacity and manufacturing ships (of all categories including container vessels) at a pace not seen since 2008. According to one such report, broking company Arrow estimated that ship building capacity in China, South Korea and Japan was up 20% from the year ago-level with the bulk of new capacity concentrated in China and South Korea.
The cost of disruption
Depending on how long it lasts, conflict may impact the use of global sea lanes in some fundamental ways. It is now several months since the conflict in Gaza and the attacks by the Yemen-based Houthi militia forced major container shipping lines to avoid using the Red Sea and the Suez Canal to access ports in Europe and the US east coast.
Bloomberg reported that the number of container ships passing through the Suez Canal had reduced by about 77% from year ago levels. The lines ended up sailing around Africa at considerable extra cost, which in turn added to freight rates. Local proof of this impact was visible in news reports about the first quarter (2024-2025) results declared by Indian steel company, Jindal Stainless.
Moneycontrol wrote: “The ongoing Red Sea issue extended transit times and freight costs from India to the western markets, and paucity of containers further affected exports, the company said in a statement.’’
It further noted that to address the ongoing container shortage, Jindal Stainless will opt for breakbulk shipping. On the other hand, for container lines, the emergent situation appears one of both increased costs and increased profitability.
Early August 2024, industry reports suggested that the World Bank had finally managed to quantify the impact of the trade disruptions. A newly launched Global Supply Chain Stress Index (GSCSI) shows that each one million TEUs of the container trade coming under stress raises the Shanghai Containerised Freight Index (SCFI) – a leading indicator of spot freight rates – by 2300 dollars per TEU.
For most of 2024, the SCFI has been at high levels never seen outside the period of the pandemic. This August 1, news reports said that shipping major A.P. Moller-Maersk A/S (APMM) has raised its financial guidance for the third time in three months due to a combination of the ongoing Houthi attacks on shipping in the Red Sea (and ships forced to sail around Africa as a consequence) and robust container market demand.
The continuing search for alternative routes
Needless to say, the most affected by the conflict-induced uncertainty in the Red Sea would have been cargo leaving Chinese ports and ports in Far East Asia for destinations in Europe, and vice versa. These voyages have traditionally counted on the Suez Canal for a shorter transit. Now a long spoken of alternative route, tried some years ago by a major container carrier and abandoned respecting environmental considerations, has witnessed Chinese ships moving in.
As per a report in gCaptain in July, 2024, two Chinese container ships set sail for the Arctic with the aim of reaching Europe via that ice clad marine geography. Both these ships are small (of feeder size). The Xin Xin Hai 1, a light ice-class vessel carrying 1220 standard containers, left the port of Taicang near Shanghai on July 5. It is accompanied by a nuclear-powered ice-breaker. Significant portions of the Arctic are said to be ice free this summer but the assistance of an ice-breaker is required to tackle the frozen East Siberian Sea. By end July (when the above said report appeared), the Xin Xin Hai 1 was already past the Bering Straits and on its way to the North Sea route.
A second Chinese ship, the Xin Xin Hai 2, left for the same route a week behind the first one. Both ships are headed for the north west Russian port of Arkhangelsk and from there, to ports in the Baltic Sea in Europe. The report said that some Panamax ships of 5000 TEUs capacity, belonging to a Hong Kong-based company, have also received clearance to transit to Europe via the Arctic, potentially making them the biggest ships yet to try the northern route. Among major container lines from the West, only Maersk Line has completed a trip via the Arctic previously; the Venta Maersk in 2018. Several large western operators like MSC, CMA-CGM and Hapag Lloyd held back from sailing through the Arctic for environmental reasons.
No sign of Red Sea risk reducing
The disruptions of the 2020s are said to have gifted the world’s liner business, market conditions for its greatest earnings ever. There was COVID-19, the drought in the Panama Canal, which affected transit of ships from the Atlantic Ocean to the Pacific and vice versa. The evolving unrest in Gaza and West Asia has also impacted shipping through the Red Sea and the Suez Canal.
Tough for shippers, the predicament, as mentioned earlier, has aided shipping industry revenues and the world’s container ship fleet is set to touch a new landmark. The global container shipping fleet may exceed 30 million TEUs (twenty-foot equivalent units) in capacity, for the first time ever, by the end of the third quarter of 2024. It could hit 30.5 million TEUs when the year concludes, according to industry reports citing estimates from The Baltic and International Maritime Council (BIMCO), the world’s largest direct-membership organisation for shipowners, charterers, ship brokers and agents.
But it is not entirely an expansionist trajectory. Growth in cargo volumes is not forecast to be as bullish and therefore ship recycling could rise with commensurate check in the growth of overall fleet size. It has also been mentioned that a potential return of peace to the Suez Canal and Red Sea region with normalcy reinstated to voyages via that route may see a fall in the demand for ships courtesy voyage length and duration restored to earlier patterns. That last bit may have now come under a fresh question mark.
This July 31, roughly ten months after the October 2023 attack by Hamas on Israeli civilians and several months into Israel’s subsequent war on Hamas in Gaza, Hamas leader Ismail Haniyeh was assassinated in Teheran. Separately, Hezbollah commander Fuad Shukr was killed in Beirut, an act, Al Jazeera said, Israel has claimed responsibility for. Iran has pinned responsibility for Haniyeh’s death on Israel and vowed retaliation. The United States has said that it will deploy additional fighter aircraft and war ships in West Asia to defend Israel.
Few in the container shipping business expect the insecurity in the Red Sea region and its impact on global trade, to end soon. The spectre of Chinese container ships in the Arctic, should perhaps be seen against this backdrop. As should humanity’s willingness to test that environmentally sensitive region. It’s the price of conflict.
Shyam G. Menon is a freelance journalist based in Mumbai.
