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Higher Freight Rates to Offset Costs from Red Sea Diversions -Fitch

Mike Schuler
Total Views: 1834
December 21, 2023

Following recent attacks on commercial vessels in the Red Sea, shipping companies are facing increased costs due to longer voyages around the Cape of Good Hope. However, according to a report by Fitch Ratings, these additional costs may be more than offset by rising freight rates if the disruptions continue for more than a few days.

Fitch Ratings sees container shipping as the sector most likely to experience the highest increase in freight rates, considering 25%-30% of global container shipping volumes rely on the Suez Canal. Bulk carriers follow closely behind. However, tankers, which predominantly originate from the Middle East and are already enjoying high rates, may see only limited rises, according to Fitch.

Rerouting around Africa can significantly increase travel time and reduce effective global container shipping capacity. However, disruptions are not expected to have a meaningful impact on global shipping’s supply-demand balance in the medium term. Container ship supply is still expected to exceed demand growth in 2024.

Consumers to Bear the Brunt of Red Sea Crisis as Shipping Rates Soar

Fitch estimates that rerouting around Africa, which can increase travel time from the Far East to Europe by 50%, could potentially reduce global container shipping capacity by 10%-15%. However, Fitch Ratings does not anticipate significant long-term disruptions to the global shipping supply-demand balance and still expects container ship supply to exceed demand growth next year by about 4 percentage points.

While the disruptions may lead to higher annual container contract rates for affected routes, Fitch Ratings considers it unlikely for these disruptions to last beyond two quarters.

Fitch notes similarities between current disruptions and past port congestion issues, such as the Suez Canal blockage in 2021. However, there also some key are differences, including higher operating costs and increased certainty of arrival times. Demand for goods in North America and Europe is also weaker compared to previous years.

However, when combined with drought restrictions in the Panama Canal, the disruptions in the Red Sea amplify the impact on global trade and highlight bottlenecks in global supply chains, which can have significant effects on various industries, Fitch says.

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