News / Weak demand and overcapacity adding to carrier Red Sea stress

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Despite the considerable disruption to container shipping caused by the Red Sea crisis, consumer demand remains weak and, at the same time, the liner industry is heavily oversupplied with capacity.

Indeed, analysts believe the huge spikes in east-west spot rates since December have been driven, for the most part, by fears there could be a return to the pandemic supply chain crunch that choked the liner industry in 2021 and early 2022.

“There is ample room to cover disruption such as this,” said Drewry’s senior manager for container research, Simon Heaney.

“Certainly, more ships are needed to maintain those weekly services, but there is spare capacity; there are newbuildings coming in thick and fast and there is existing tonnage from other oversupplied trades that can be transferred across.”

Mr Heaney was speaking during Drewry’s today’s Container Market Outlook webinar, which focused on the impact of the Suez Canal diversions on liner markets.

“It was a deterioration of port productivity which was a major reason why rates went into orbit during peak Covid, and there is definitely a risk that these off-schedule ship diversions will cause ships to cluster on their arrival in Europe, leading to port congestion and, eventually, worsening equipment shortages… but in our view, it’s going to be a fairly short-lived phenomenon, because liner networks will recalibrate very quickly,” said Mr Heaney.

Drewry suggests Suez Canal diversions will last for “at least the first six months of 2024”, based on its discussions with clients and carriers, and that rates will remain elevated on the affected trades for the duration of the crisis – albeit that they will not go high enough to stoke inflation.

In fact, container spot indices from Asia to Europe are beginning come off their highs, with reports that demand is soft for the period post-Chinese New Year, which commences 10 February.

“It takes time to reposition ships, so in our view the pinch will be worse in this initial stage, but we think things should ease once these Red Sea diversions become part of longer-term planning by carriers,” said Mr Heaney.

His colleague, Philip Damas, head of Drewry’s supply chain advisors, agreed there had been an element of “panic” in China at the beginning of the Suez Canal diversions, with CNY looming and ships and containers in the wrong places.

“This is really what is behind the big increase in spot rates,” said Mr Damas, noting that in the next five weeks on the Asia to North Europe and Mediterranean tradelanes there will be 34 blanked sailings out of 145 scheduled.

However, the big difference is that the cancelled sailings would be for operational reasons, in that the ships are not physically there, rather than due to strategic capacity management by carriers, noted Mr Damas.

“It’s certainly disruptive, but it’s not going to be as painful as we saw recently with the pandemic…people are fearful, rightfully so, but I think we need to try not to be prisoners of the moment and think it’s going to a collapse into those depths,” added Mr Heaney.