Agreement between Israel and Hamas to pause conflict has raised hopes over the prospect of ocean container ships returning to the Red Sea.
Here are five key questions for shippers ahead of another period of uncertainty and volatility in ocean supply chains.
How likely is it container ships return to the Red Sea?
An agreement to pause fighting does not necessarily mean a large scale return of container ships to the Red Sea. It must also be pointed out that, while a ceasefire is a significant step forward, there is still a long way to go before a real peace deal is reached.
Carriers will want assurance they have safe passage for crews and ships in the long term and that the situation will not suddenly deteriorate.
Diversions around the Cape of Good Hope are not what the industry wants, but the situation is stable and being managed. It took many months and extreme disruption to achieve this stability so carriers will be wary of heading back to the Red Sea too soon. If it goes wrong, they’re back to square one.
Therefore, an immediate large scale return is highly unlikely.
Are carriers prepared for a return to the Red Sea and how will they do it?
Several carriers have published two versions of 2025 services – one where ships continue to sail around the Cape of Good Hope and the other going through the Red Sea.
Carriers are ready to make the change when the time is right, but it will be done in a phased way. Carriers will start by sending ships with a capacity below 10,000 TEU (20ft equivalent container) through the Red Sea. Once this is done, they will gradually increase the size of vessels transiting the region before finally the very large 18,000-24,000 TEU containerships.
The complexity of ocean container shipping networks means it could take 1-2 months for schedules to transition to ‘normal’ operating conditions through the Red Sea.
What will happen once ships begin sailing through the Red Sea?
There will be severe disruption in the immediate period following a return of ships to the Red Sea.
When you consider sailing times on a trade that would ordinarily transit the Suez Canal, such as Shanghai to New York, is 30-40 days, you begin to see why it will take time for schedules to adjust.
Ships will not be where they are supposed to be and will arrive at ports much earlier (or later) than scheduled. If large numbers of ships arrive at ports at the same time, it will cause massive delays and congestion that ripple across ocean supply chains.
When conflict in the Red Sea escalated in December 2023, there was disruption in the immediate aftermath. However, it was more than six months later when the real force of congestion hit and sent spot rates spiralling.
On the trade from Far East to North Europe, average spot rates were up 426% in July compared to pre-Red Sea crisis. Problems in ocean container shipping can be slow burning and emerge at unexpected times and in unexpected ways – shippers must remain at a heightened state of alert.
What will happen to freight rates?
There will be chaos as schedules adjust to routes through the Suez Canal. Spot rates will be extremely volatile but trending strongly downwards.
Much will depend on carriers’ capacity management. A large scale return to the Red Sea would mean global average sailing distances drop to pre-crisis levels. In turn, this would see a drop in global TEU-mile demand, which factors the distance each container is transported as well as the number moved.
Even with a forecasted 3% growth in global volumes in 2025, TEU-mile demand could be down 11% from 2024 if there is a largescale return to Red Sea.
Combined with record deliveries of new ships, the market will be flooded with capacity, with carriers needing to remove around 1.8m TEU to retain the status quo.
Scrapping of ships will increase and carriers have got much better at capacity management in recent years, but it is unlikely this will be enough to prevent freight rates from collapsing.
What can shippers do to reduce risk in freight procurement in 2025?
The potential for freight rates to collapse is good news for shippers on the face of it. However, it also presents a problem for shippers looking to lock into new long term contracts because it is extremely difficult to know when to go to tender and what rates to target.
On the trade from Shanghai to New York, average spot rates have fallen from the heights seen in July last year but are still 14% higher than a year ago at USD 6590 per FEU. Meanwhile, long term rates are also holding strong at USD 3765 per FEU, up 11% compared to a year ago.
If a shipper locks into rates at this level for the next 12 months and the market collapses due to a return to the Red Sea, they are paying way over the odds for their freight and putting themselves at a competitive disadvantage.
On the other hand, a return to the Red Sea is far from certain, meaning carriers will have a strong argument for keeping rates elevated.
The answer many shippers and service providers are coming to is using Xeneta data as an index to base the new contract against. This way, the rate the shipper pays is tracked against the market movements, for example, remaining elevated if there is no resolution in the Red Sea or declining in the event there is.
The alternative is spending many months and multiple tender rounds to agree a new contract only to have it torn up within a matter of days if the Red Sea re-opens at large.
If the Red Sea does reopen, shippers will have a big task on their hands adjusting supply chains to new transit times. Do they also want to be spending time and energy renegotiating contracts with carriers who will not be in any rush to do so?
In the face of such uncertainty, the case for an index-linked contract in 2025 becomes overwhelming. Why would any shipper expose themselves to this level of risk when there is a very simple alternative?
