Geopolitical Developments Disrupt Shipping Industry; Some Carriers Eye Red Sea Routes
In a surprising turn of events, several shipping companies are attempting to restore services along the Red Sea route, signaling a shift in response to heightened geopolitical risks in the region. Many foreign trade enterprises have learned from the challenges posed by the COVID-19 pandemic, utilizing financial instruments such as hedging to mitigate risks.
On December 22, the Freight Index (Euro Route) futures’ main contract, EC2404, hit the daily limit for the fifth consecutive trading day, closing at 1391.2 points, a 14.99% surge. This surge, exceeding 50% over the last five days, was triggered by unexpected geopolitical events causing a rapid and intense rise in spot market freight rates, which subsequently affected the futures market.
Post-market on the same day, the Shanghai Shipping Exchange announced adjustments to trading fees for Freight Index (Euro Route) futures contracts (EC2404, EC2406, EC2408, EC2410, EC2412), effective December 25, with transaction fees set at 0.006% of the transaction amount and intra-day position-closing fees at 0.012% of the transaction amount.
Senior analysts attribute the recent fluctuations in Freight Index (Euro Route) futures prices to unexpected geopolitical events causing a significant and rapid surge in spot market rates.
The Shanghai Shipping Exchange’s latest weekly report highlighted a substantial increase in transportation costs in the Asia-Europe shipping market due to threats of armed attacks in the Red Sea region. This has led to major container shipping companies operating on the Asia-Europe route announcing diversions, resulting in a significant increase in shipping distances and costs, along with a decrease in vessel turnover efficiency.
Recognizing the potential impact on the market, major carriers significantly raised their market quotations last week. On December 22, market rates for exports from Shanghai to Europe and the Mediterranean basic ports were reported at $1497 per FEU and $2054 per TEU, representing increases of 45.5% and 30.9%, respectively.
On December 25, analysts shared a research report highlighting the significant volatility in the market. They emphasized the influence of disruptions in the Red Sea on shipping routes, creating potential for a shortage of shipping capacity on the Asia-Europe route in the short term.
In response to the market anticipation of continued freight rate increases, sources from the Yun Qu Na platform informed reporters that some shipowners have opened bookings for flights to the Red Sea. The departure for these flights is scheduled for the end of December, with freight rates doubling.
Confirming these developments, statements on December 25 mentioned that, in line with the “Guardians of Prosperity” initiative, companies are preparing to restore operations along the east-west route through the Red Sea. They are formulating plans for the earliest possible passage of the first batch of vessels, subject to operational feasibility.
Analysts believe that this decision may alter previous predictions of a capacity shortage post-March, potentially accelerating the rebalancing of shipping capacity.
While assessing the direct impact of this decision, companies emphasized their commitment to customer predictability and supply chain efficiency. However, they noted that despite current safety measures, the overall risk in the region has not been eliminated. Companies stated that, if the safety of crew members is compromised, they would reassess the situation and initiate rerouting plans.
Following this news, on December 25, all Freight Index (Euro Route) futures contracts experienced a sharp decline, with contracts dropping by more than 8%.
Multiple institutions observed a weakening bullish sentiment in the market, evidenced by a decrease in open interest for all contracts and a noticeable reduction in positions. Despite closing with narrowed losses, the high trading volumes suggest significant market divergence, making it challenging to foresee a trend in the short term.
To caution market participants, the Shanghai Futures Exchange issued two announcements on December 25, adjusting margin ratios and price limits for Freight Index (Euro Route) futures contracts. These measures aimed to remind traders to prudently assess the short-term impact of unforeseen events on spot freight prices and to engage in futures markets with rational position control.
After a minor retracement, on December 26, the main Freight Index (Euro Route) futures contract stabilized and resumed an upward trend, hitting the daily limit with a 16.99% increase.
Analysts’ analysis underscores the need to monitor the actual execution effectiveness of escort operations in the Red Sea, the potential loss of passage efficiency compared to normal levels, and whether the expanded insurance costs will further transfer to downstream shippers.
Amid the ongoing developments, as of December 25, no other carriers have followed in resuming Red Sea routes. According to data from Yihailan, container ship transits through the Mandeb Strait have significantly decreased since December 15, with both the number of vessels and individual tonnage experiencing substantial declines.
Opting for the longer route around the Cape of Good Hope, although extending voyage durations, is cost-free, unlike the Suez Canal, which imposes tolls. The Suez Canal Authority reported that approximately 23,000 vessels transited the canal in 2022, generating around $8 billion in toll revenue. With an average toll of $347,000 per vessel, this cost continues to rise annually.
It’s worth noting that the Suez Canal contributes significantly to Egypt’s economy, constituting about one-third of the country’s total economic output. The full economic impact of the recent disruption in the canal remains to be assessed.
The previous Suez Canal blockage incident highlighted the vulnerability of global trade and supply chains. While the impact of the recent ship attack is smaller than the earlier event, critical hubs like the Suez Canal and Panama Canal, if disrupted, can still have a considerable impact on global trade.
Analysts point out that rerouting ships around the southern tip of Africa incurs additional costs of $1 million per voyage and 7-10 days of travel time. This has led to noticeable fluctuations in international oil prices.
As reported by the Shanghai Securities News, international oil prices have rebounded since the Red Sea tension escalated. WTI crude oil has risen nearly 7% to $73.49 per barrel, while Brent crude has also gained nearly 7% to $78.89 per barrel as of the December 22 close, both reaching new highs since December 5.
However, compared to the impact of the October Israel-Palestine conflict, the current rise in oil prices indicates a higher level of market rationality. While the Red Sea blockade may increase transportation costs for some oil tankers, it has not substantially affected the fundamentals of the oil market. Since Yemen and Israel are not major oil-producing countries, the disruption is unlikely to impact oil production in the Middle East. Additionally, the majority of Middle East oil exports depend on the Strait of Hormuz, so as long as that shipping route remains open, there should be minimal impact on the global oil market fundamentals and trade patterns.
Analysts suggest that from a medium-term perspective, as the situation approaches resolution, the easing of tensions in the first quarter of next year is expected to gradually calm the subsequent impacts on supply chains, shipping, and commodity prices.
In conclusion, the geopolitical developments in the Red Sea have prompted shifts in the shipping industry, with some carriers eyeing the resumption of routes. While this decision may alter previous market expectations, the overall impact on global trade, supply chains, and oil prices remains uncertain. Analysts advise caution, emphasizing the need for prudent evaluation of short-term disruptions and rational participation in the futures market.
Post time: Dec-27-2023