Ocean shipping: The tide turns

The first two-thirds of 2024 hasn’t been particularly kind to shippers, global containership operators, and U.S ports. They’ve had to deal with rebel attacks on ships transiting the Suez Canal and the Red Sea, congestion at Asia-Pacific ports such as Singapore and Malaysia, a Panama Canal slowly recovering from last year’s drought, and more recently a three-day strike at U.S. East and Gulf Coast ports.

It’s a familiar picture: a maritime market experiencing high demand while dealing with geopolitical factors that have shifted global supply chains, upended normal operations, and sucked up available capacity. As a result, rates for container shipping have been on the rise and stayed stubbornly strong most of the year.

“We are seeing the exact same playout as during the pandemic,” observes Lars Jensen, principal with maritime consultancy Vespucci Maritime. “There is an overall lack of capacity.”

Red Sea reverberations

In this case, the biggest culprit is hostilities in the Middle East, which have forced containership operators to reroute Asia-origin vessels destined for Europe and the U.S. East Coast from the Red Sea to around Africa’s Cape of Good Hope.

Because going around Africa takes longer, capacity has been tied up, and carriers have needed to add more vessels so that they can maintain schedules. To illustrate this trend, Michael Britton, head of North American ocean products for Maersk, cites one example where if the containership operator had not added two vessels to a service, it would have been up to two weeks before another voyage was offered.

“How do we respond to a requirement to add two to three vessels to a string, so we can maintain frequency of sailings?” he asks. “Where does the extra capacity come from?”

Carriers like Maersk have just two options, Britton says. They can either go to the charter market, or they can pull ships from other parts of their network to fill in the gaps. According to Britton, the charter market is limited and comes with higher fixed costs. Furthermore, these additional costs are not just for a couple of weeks or months. In today’s market, with charter rates at a premium, those vessel owners typically demand—and get—multiyear contracts for the capacity. As a result, vessel operators have mostly taken the second option of pulling ships from other routes and redeploying them into the lanes serving Asia to Europe or the U.S. East Coast.

The route changes have caused transit times to increase by anywhere from seven to 10 days to the U.S. East Coast and by 14 to 28 days or more to some locations in Europe and the Eastern Mediterranean.

Compounding the problem is the fact that cargo that once was able to move on larger ships through the Red Sea now needs to be transshipped, which is the transportation of cargo containers from one vessel to another, while in transit to its final port of discharge. Transshipping commonly happens when the cargo can't reach its final destination through a direct route. “It takes more time to handle four smaller vessels than one big [one],” Jensen notes.

Nor have the new routes been easy on the ports. There have been reports that the irregular schedules have led to what is called “ship bunching,” when multiple vessels arrive within a short time of one another.

“Adding insult to injury, nothing runs on time,” says Jensen. “That makes it exceedingly difficult to plan yard layout, which reduces port efficiency [and delays ship loading and departure].”

Maersk, for example, has seen increases in congestion and waiting times at key hub ports and some Asian ports. “It’s a networkwide challenge, not just limited to the U.S. trades,” Britton says.

Rising costs

Additional costs are piling up as well. To make up for longer transits, ship operators are running vessels at faster speeds. That’s incurring higher fuel and other operating costs, which by some estimates are as much as $1 million per string.

Then there is the issue of containers. With longer transit times, containers are taking longer to get back to origin ports. “There is no use having a weekly sailing if I don’t have boxes to release to customers,” Britton says.

With the current trade lanes and transit times, it’s taking up to 24 days or more for boxes to return. “The only way to stay ahead of that and carry the same volumes is to buy and deploy more containers,” Britton notes. “You can either do one of two [things]: invest in capacity and higher operating costs or eliminate the service. If you want transit time and port coverage, that requires investment and higher operating costs—and with that comes higher rates.”

Pulling forward

At the same time that capacity has been tight, demand has also been on the rise. According to Britton, volumes have been higher than expected due to a return to normal inventory stocking cycles and continuing strong demand from U.S. consumers. He also notes that some China-based suppliers, seeing weakness in their own domestic markets, are pushing more into export markets than projected.

Finally, the longer transit times themselves have also been contributing to the increase in demand. “It’s making [businesses] order earlier to factor in those longer leadtimes or maybe pull forward some of the traditional peak season volumes we’ve seen,” Britton says. “There is some front-loading going on.”

That aligns with what shippers have been telling Port of Los Angeles Executive Director Gene Seroka. While the conflict in the Mideast hasn’t significantly impacted his port, Seroka says shippers are telling him that they are altering their ordering and supply chain timelines to accommodate the longer transit times.

A reversal

In all, 2024 has been a reverse image of where the market was nearly a year ago. In 2023, capacity was relatively available, rates were falling, and new ships were coming online at a rapid pace, foreshadowing a capacity glut. Shippers were haggling for the lowest rates they could find.

“October to November last year, rates were lower than prepandemic,” Jensen says. “At that point in time, the industry talk was how dumb the carriers were to overorder vessels.”

But now the shoe is on the other foot, according to Seroka. “New build capacity coming out of shipyards was thought to be a concern,” he says. “It has worked out to be just the opposite because so many of the new-build ships were put into service on these longer strings.”

Without that excess capacity, the ocean carriers might not have been able to manage the Red Sea crisis. “Imagine where we would be right now [if vessel lines had not ordered ships at the rates they did],” Jensen says. “We would not be able to service the global supply chain.”