The number of shipping companies refusing to risk Red Sea transits is growing by the day. The waters off the Cape of Good Hope are about to get much busier as more ships circumvent Africa on a detour around the Red Sea and Suez Canal.
As of early Tuesday, companies confirmed or reported to be pausing Red Sea transits and/or rerouting around the Cape of Good Hope included container lines Maersk, MSC, Hapag-Lloyd, CMA CGM, Zim (NYSE: ZIM), Evergreen, Yang Ming, Cosco, OOCL, HMM and ONE; tanker owners Frontline (NYSE: FRO) and Euronav (NYSE: EURN); car carrier owner Wallenius Wilhelmsen; and oil and gas companies BP (NYSE: BP) and Equinor.
That list doesn’t capture the full effect, as ships controlled by other operators are also detouring. Argus reported that three liquefied natural gas (LNG) carriers and three very large gas carriers (VLGCs) diverted from the Red Sea route on Monday.
Longer voyage distances should boost rates
Diversions around Africa are driven by ongoing attacks on commercial shipping by Yemen’s Houthi rebels near the 20-mile-wide Bab-el-Mandeb Strait.
The attacks continue. According to U.S. Central Command, there were two more attacks on Monday: on the product tanker Swan Atlantic and on the bulk carrier Clara.
Ship diversions around the Cape significantly extend voyage distance, increasing shipping demand measured in ton-miles (volume multiplied by distance) and constraining transport capacity, a positive for rates.
“Longer voyages are effectively a synthetic reduction in capacity due to fewer asset turns, which drives up pricing,” said Deutsche Bank analysts Amit Mehrotra and Chris Robertson in a client note.
The “dangerous dynamics” in the Red Sea highlight “how delicate global supply chains are” and how “prone to disruptions” they remain, said Mehrotra and Robertson.
How long will Cape detours persist?
The longer the period in which ships divert around the Cape, the greater the upside for freight rates and shipping stocks.
Thus, the focus of the rate and equity debate is on whether this will be a brief event, à la the Ever Given grounding in the Suez Canal in March 2021, or a more sustained trend, as with Panama Canal diversions due to low water levels across the second half of this year.
A new U.S.-led multinational military effort to protect commercial shipping from Houthi attacks — Operation Prosperity Guardian — was announced Monday by Secretary of Defense Lloyd Austin.
The questions on Operation Prosperity Guardian, from a freight rate and shipping stock perspective: Will ship operators feel comfortable enough to swiftly resume passages through the Bab-el-Mandeb as part of military-protected convoys? Or, will the new initiative lead to coalition strikes in Yemen that further escalate regional hostilities, making ship operators less likely to take a route through a war zone? And if military action does escalate, how long would it take for the Houthis’ attack capabilities to be destroyed?
“Convoys will take time to form and are not an ideal long-term solution, as vessels face added queueing time, slower sailing speeds and limited versatility,” said Omar Nokta, shipping analyst at Jefferies. “However, they are a much better alternative time-wise than sailing around Africa.”
Upside for container freight rates
Potential rate and shipping stock upside from the Houthi attacks varies by sector, depending on exposure to the Suez Canal route.
Nokta, citing data from Clarksons Research, said that 21% of global container shipping moves transit the Suez, with the share at 12% for refined product moves, 11% for LNG, 8% for liquefied petroleum gas (LPG), 8% for crude and 5% for dry bulk. For crude tankers in the Suezmax size category (1 million-barrel capacity) or smaller, the share jumps to 20%.
“Containers have the biggest upside, in our view, given the potential for a severe tightening of capacity. This is followed by midsize crude and product tankers, as those segments are already stretched thin,” said Nokta.
Pareto analyst Eirik Haavaldsen noted that most of the Cape detours so far involve container ships, and pointed out that container-ship operators have a sector-specific business rationale to do so. “Market conditions are obviously extremely weak, and as such [there is a] great incentive for the larger liner companies to boost distance,” he said.
Frode Mørkedal, analyst at Clarksons Securities, said that Red Sea upside to Asia-Europe spot rates is particularly timely for container shipping lines.
“This increase … comes just as liner companies are wrapping up annual Asia-Europe contract negotiations with customers for the coming year. Because of the recent [spot] rate increase, they may be able to secure more favorable Asia-Europe [contract] rates than previously anticipated,” said Mørkedal, who added that trans-Pacific spot rates are also rising.
Upside for tanker spot rates
Mørkedal believes there is more upside in tanker stocks than container stocks.
Container shipping capacity is set to grow 8% in 2024 due to newbuilding deliveries, versus expected trade growth of 3%-4%. Cape detours “could theoretically close the gap,” but because “the likelihood of long-term disruptions remains low,” it won’t change the fundamental negative outlook in container shipping, he maintained.
Mørkedal said that current crude and product tanker stock prices have yet to reflect potential Red Sea disruptions and “the market is already in a tight balance and any disruptions could have a significant impact.”
Rates for Suezmax tankers “could in theory soar to around $200,000 per day,” he said. That’s more than quadruple current spot rates of $48,800 per day.
Ship brokerage BRS does not see enough tanker reroutings yet to sharply increase rates for Suezmaxes, but does see near-term upside potential for Aframaxes (tankers that carry 750,000 barrels of crude).
“We would need to see a larger extent of rerouting for Suezmax utilization to be boosted to levels that would be highly inflationary,” said BRS on Monday.
“The immediate positive upward reaction is more likely to be seen in Aframax trades in the Atlantic, with Europe stepping up imports from the Med, the U.S. and Latin America in fear of further losses of supplies from the Middle East.”
Import fallout ahead
The most exposed import markets in container shipping are European imports from Asia, Asian imports from Europe, and — to an increasing extent due to Panama Canal diversions — U.S. imports from Asia.
The abrupt decisions to divert around the Cape will lead to a gap of around 12 days versus previously scheduled container cargo arrivals. Going forward, ocean carriers are in position to bring weekly schedules back on track by adding more ships to their weekly service strings; container lines happen to have extra ships handy due to the deluge of newbuilding deliveries.
In the tanker trades, the largest southbound flows through the conflict zone are Russian cargoes of crude bound for India and China, according to Kpler. These tankers are considered unlikely to be attacked, given that the Houthis are backed by Russian ally Iran.
Northbound product tanker flows point to looming import risks for Europe on two fronts: jet fuel and diesel.
Kpler analyzed the share of bulk seaborne commodity flows via the Suez Canal versus total trade, and jet fuel’s share was more than twice that of any other commodity.
“Jet fuel is the most exposed, at over 30%, as a result of the important trade flow from the Middle East and India to Europe,” said Kpler. “Should attacks escalate, the supply of jet fuel shipped to Europe will be affected first.”
Argus said of the diesel supply risk: “The Mideast Gulf to Europe is a key route for diesel, as the Mideast Gulf has supplanted Russia as Europe’s primary supplier. If diesel shipments through the Suez Canal become impossible, tankers will instead sail around the Cape of Good Hope, leading to a much longer journey time and higher costs.”
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