Red Sea situation gives carriers an edge on the bottom line

Container shipping has witnessed an impressive turnaround in its economic performance. It has seen the shift of a 700 million net loss during the final quarter of 2023 to an income of US$5.4 billion within the first months of the year. This improvement is due to diversions to shipping routes in the Red Sea, which have significantly increased major shipping companies’ earnings of more than $6 billion. However, profits remain lower than the exact same time in the year before, when the shipping industry made US$13.7 billion in profit.

John McCown from Blue Alpha Capital notes that the increase in profits follows a stretch that included six quarters consecutively of lower profits. This was followed by seven quarters with record-breaking profits. The increase in profit is mostly due to pricing adjustments that result of the Red Sea situation. Geopolitical tensions have prompted majority of container ships in the Asia to Europe trade lane to go to travel a more extended route through Africa and absorbing around 8 percent of the world’s containers shipping capacities.

Maritime Strategy International (MSI) says that capacity absorption is a key factor in a rapid recovery to profitability of shipping companies as spot rates vary across Asia up to Europe experiencing significant changes. In the MSI Horizon report, following the decline in rates in spot freight rates, they increased significantly in the early part of May. It was due in part to the major transport companies instituting General Rate Increases (GRIs) in May 1st, aided by a strong demand-supply dynamic, including the increased need for ports, the congestion in ports as well as the ongoing diversions to ports and the Cape of Good Hope.

In addition, the report reveals an increase of transshipment volume within Spain as well as Morocco especially ports like Barcelona, Valencia, and the Port of Tanger. The increase in transshipment is due to Red Sea diversions, causing vessels to divert around the Cape and use feeder vessels to reach Eastern Mediterranean destinations. The use of intra-Mediterranean as well as North Europe-Mediterranean routes have seen an increase in the number of vessels, which indicates an alteration in the patterns of shipping due to the current crisis.

For the future, MSI anticipates that the combination of the effects of extreme port congestion, an increase in seasonal demand and the continued Cape of Good Hope diversions will further increase the spot freight rate between Asia and Europe. The continuing Red Sea crisis, with no solution in sight and the upcoming peak season suggest that the trend will continue upwards in shipping costs.


Source: The Plantations International Agroforestry Group of Companies