Longer routes around South Africa increase costs and delays, but also ease supply pressure
As a U.S. Customs Broker and Freight Forwarder, John S. James Co. is always monitoring the global shipping situation and how it impacts our clients. Recently, we have witnessed a major disruption in the Red Sea, where attacks by Iranian-backed Houthi rebels on container ships have forced many operators to suspend their services along this route. This means that cargo destined for Europe or the U.S. from Asia has to take a longer and more expensive detour around the Cape of Good Hope.
This unexpected crisis has created a mixed picture for the shipping industry. On one hand, it has boosted the freight rates and share prices of shipping lines, which have been struggling with overcapacity and low profitability for years. The longer journeys around South Africa reduce the effective supply of ships and containers, creating a temporary shortage that drives up prices. According to Philip Damas of Drewry, rates for 40ft containers to Northern Europe from China have risen from $1,148 at the end of November last year to about $4,000 today. Share prices for Maersk and Hapag-Lloyd are up about 20 per cent over the same period.
On the other hand, the disruption also poses significant challenges and risks for shippers and freight forwarders like us. The longer transit times around South Africa add about 10 to 14 days to the delivery schedules, which can cause delays and disruptions in the supply chain. This is especially problematic at this time of the year, when Chinese producers are rushing to ship their goods before the Chinese new year holiday. Moreover, the higher freight rates increase the transportation costs for shippers, which can erode their margins or force them to pass on the costs to their customers.
At John S. James Co., we are doing our best to mitigate the impact of the Red Sea crisis on our clients. We are constantly communicating with our partners and carriers to find the best solutions and alternatives for each shipment. We are also advising our clients to plan ahead and book their space and equipment well in advance, as the situation is likely to remain volatile for at least the next month. We are also keeping an eye on the long-term implications of the crisis, as it may affect the supply and demand balance of the shipping industry for years to come. If the disruption persists, it may discourage the scrappage of older and less efficient ships, which is needed to reduce the chronic overcapacity that plagues the sector. This could lead to a reversal of the current rate and price surge, and a return to the low profitability and high competition that characterized the industry before 2019.
We hope that this article has given you some insights into the current shipping situation and how it affects your business. If you have any questions or concerns, please do not hesitate to contact us. We are always here to help you with your customs and freight needs. Thank you for choosing John S. James Co. as your trusted partner.