Philip Hennessey, Xeneta Director of External Communications, discusses the danger of taking maritime supply chains for granted following the outbreak of conflict in the Red Sea
Do we fully appreciate the fragility of the world we inhabit?
As a society we take advantage of the wonders of the modern age to make our daily lives that little bit easier. The world is designed around our convenience, bending to our every whim.
And we like it that way.
With just the tap of our mobile phone we can order an almost infinite range of goods to be delivered straight to our door in a matter of days, if not hours.
Geographical boundaries are no barrier in the pursuit of consumer satisfaction. Fruit from South America, electronics from Asia or sauvignon blanc from New Zealand? You name it, you got it. Of course, there is a far more serious game at play and the stakes are much higher than whether the latest iPhone is available in your favorite colour.
Trade fuels economies and is the lifeblood of the world we live in. It is what drives civilisation and impacts the lives of almost every human on the planet. For something so fundamental to our existence, why does society take it for granted?
When we’re ordering our next pair of trainers or buying a new car, we rarely stop to think it is entirely dependent on an almost incalculably-complex infrastructure of global supply chains all working in frictionless harmony. At the very heart of these global supply chains is ocean freight shipping, with the largest vessels transporting more than a billion dollars of cargo on every sailing. This topic was raised by Peter Sand, Xeneta Chief Analyst, during a recent edition of Maersk’s Beyond the Box podcast, which focused on the conflict in the Red Sea and its impact on ocean freight shipping.
Currently 92% of container ships which would ordinarily transit the Suez Canal are avoiding the area due to the risk of attack from Houthi Militia.
Sand said: “When something like this happens, it’s a wake-up call for the citizens of the world that what they took for granted should not be taken for granted at any point in time.
“We need to take good care of our maritime supply chains.”
Sand is entirely correct, but the crisis in the Red Sea isn’t the first wake-up call in recent years. In a little over four years global supply chains have been rocked by major black swan events including the Covid-19 pandemic, Brexit, the Ever Given vessel blocking the Suez Canal, drought in the Panama Canal and now the ongoing situation in the Red Sea. And all of this is taking place during a US-China trade war.
If we do take the importance of global supply chains for granted, then there really is no excuse because we now have the data to understand the seismic impact of black swan events.
Xeneta is the leading ocean and air freight rate benchmarking platform. We call upon more than 400 million crowdsourced data points to provide our customers with real time visibility on ocean and air freight shipping rates on trades across the globe.
This data allows Xeneta customers to understand how much it should cost to ship goods from origin to destination at any given point in time. This is a vital data and intelligence platform, particularly when carrying out tenders for new contracts. But the data serves an even wider purpose– it allows customers to understand and manage the risks associated with black swan events, helping them to build resilience in their supply chains. Never before have we had so much data at our disposal to understand and shape the future of global supply chains. From opaqueness comes transparency and an opportunity to drive a better – and more resilient – way of working.
If we use Xeneta data to analyse the impact of Covid-19 on the cost of ocean freight shipping, the figures are simply staggering.
In March 2020, the average spot rate for shipping a 40ft-equalivent shipping container (FEU) from the Far East to North Europe was USD 1560. By January 2022 the rate on this trade reached a pandemic peak of USD 14 790 per FEU – a near 850% increase.
From the Far East to US West Coast, spot rates increased from USD 1470 per FEU in March 2020 to USD 9700 in February 2022 – a more than 550% increase.
From the Far East into the US East Coast rates increased from USD 2750 per FEU in March 2020 to USD 12 680 – a 360% increase.
It would have been interesting to be a fly on the boardroom wall during this period. Finance Directors were no doubt demanding answers as to why it was costing more than eight times the agreed budget to transport their goods. Without the Xeneta data at hand to help explain these extraordinary market forces it would have been an even more difficult conversation.
These rates increases were driven by exponential growth in consumer demand, mainly in the US and Europe, and China’s appetite to take advantage by increasing production. This stretched ocean freight shipping capacity to breaking point and congestion at US West Coast ports wreaked havoc, which then spread across other trades.
With limited available capacity onboard vessels, ocean freight carriers were prioritising containers belonging to the businesses paying the highest rates. Those importers and exporters with long term agreements at lower rates faced having their goods left at the port, giving rise to accusations of opportunistic behaviour within the industry, preying on fears of empty shelves and warehouses.
Xeneta customers are now using data to look much deeper than basic market averages to ensure they target the rates and service providers that protect supply chains in the event of a black swan.
Returning to Peter Sand’s comments in the wake of the Red Sea crisis – are we doing enough to protect our maritime supply chains?
Perhaps the declining market in 2022 and 2023 allowed for another false sense of security to set in. The pandemic and Ever Given incident were becoming ever more distant in the rear view mirror and the market became accustomed to lower rates.
By February 2023 trades from the Far East to US East and West Coasts had fallen back below their March 2020 levels. The trade from the Far East into North Europe returned to its March 2020 level in April 2023. Then, in mid December 2023, the Red Sea crisis saw rates increase once more. Between 14 December 2023 and 1 February 2024 spot rates from the Far East to North Europe increased from 1530 per FEU to USD 4830, an uplift of more than 200%. From the Far East to US East Coast rates increased by more than 150%, moving from USD 2490 per FEU on 14 December to USD 6250 on 1 February. Finance Directors will once again be demanding to know why logistics budgets are being torn up.
The conflict is impacting maritime supply chains beyond container ships. Just 30% of the usual shipping capacity is transiting the Suez Canal, which also includes bulk carriers, car carriers and tankers carrying oil and liquified natural gas.
The Red Sea crisis is also a case in point on the global nature of black swan events.
The Far East to US West Coast trade does not transit the Suez Canal, yet rates still increased by nearly 200% between 14 December 2023 and 1 February 2024.
Many US importers are currently in negotiations with ocean freight providers over new long term contracts and will argue strongly that Far East trades into the US West Coast should not be impacted by the Red Sea crisis. Ocean freight carriers on the other hand will argue they must remove capacity from the Transpacific and Transatlantic routes to mitigate the increased sailing times on services from the Far East into Europe and the US East Coast due to diversions away from the Suez Canal. It remains to be seen who wins that argument, but it is clear there is no escape from the impact of a major black swan event, no matter where in the world it takes place.
An increasing frequency of geopolitical and climate related disruptions in coming years means businesses must adopt agile operating models to respond quickly to these major global events. The Xeneta platform provides rates and intelligence for air cargo as well as ocean, helping our customers to understand how best to choose different transport modes. For example, during Covid-19 when ocean freight service reliability was badly affected, there was a significant increase in the use of air cargo to protect supply chains.
However, the pandemic also saw most of the world’s air passenger services grounded, resulting in a shortage of air cargo capacity. Xeneta data reveals this caused the global average spot rate for air cargo to increase by 180% between December 2019 and December 2021, reaching a peak of USD 5.12 per kg.
If pandemics and conflict are not sufficient to demand a data-driven deep dive into supply chain resilience then the climate crisis certainly should do because the warning signs are already there.
The Panama Canal – another of the world’s critical trade arteries – has been impacted by drought in the Gatun Lake. Months of reduced rainfall has seen the lowest water levels since the Panama Canal Authority began keeping records in 1965. This has resulted in a reduction in the number of vessels permitted to transit the canal, down from approximately 36 per day under normal conditions to just 22 in December 2023 and 24 since January this year.
Given the weight of evidence regarding climate change and the increasing frequency of climate-related events across every continent on the planet, there is nothing to suggest the Panama Canal will not continue to be plagued by drought for years to come. If one of the world’s most important waterways can be compromised in such a way, it demands serious consideration of the likely impact of climate change across the world’s supply chains.
Reducing impact on the climate should be at the top of the list of priorities for all stakeholders in the ocean freight shipping industry. Positive steps are being taken, whether that is through the introduction of low emissions technology or regulations such as the EU-ETS, but more needs to be done.
Xeneta publishes a Carbon Emissions Index (CEI) in partnership with Marine Benchmark to provide insight on the carbon intensity of ocean freight shipping lines and carriers across 48 global trades. Xeneta will be a vital data and intelligence platform in addressing the climate emergency within the ocean freight shipping industry.
Betting against future black swans is a foolish endeavour given our recent history and the current global climate – both environmental and political.
Former UK Prime Minister David Cameron recently stated: “It is hard to think of a time when there has been so much danger and insecurity and instability in the world. The lights are absolutely flashing red on the global dashboard.”
The ocean freight shipping market is now a key battleground for the world’s superpowers and has been at the epicentre of a trade war between the US and China.
We have seen the implementation of tariffs on imports into the US from China, which was escalated by the Trump administration. The effectiveness of these tariffs is debatable but the ambition of the US is quite clear – to curtail the competitive advantage China achieves through low-cost manufacturing.
It is not only interventions by the US government which impact ocean freight shipping – all world powers will defend themselves in a highly-volatile market.
For example, China moved to protect its interests during the pandemic by introducing a price cap of 4 000 USD per FEU (40ft equivalent shipping container) in response to rapidly increasing ocean freight shipping rates. While Chinese ocean freight carriers only held this cap for a short period of time, it sparked an increase in surcharges, often at a 50% premium above the base price.
This is a trade war between the US and China but rising tensions over Taiwan are cause for concern – and is likely to be one of the lights flashing red on David Cameron’s dashboard.
Clearly, any military escalation in that region between these two superpowers could have catastrophic implications at a global level.
We don’t know what form the next black swan will take or its severity, but it’s a matter of ‘when’, not ‘if’. When it does arrive the ripple effects will spread across the ocean freight shipping network and someone will have to pick up the cost – whether that is businesses, workers or consumers.
It is testament to logistics providers and professionals around the world that – even during recent black swan events – society has continued to enjoy the trappings of the modern world in ignorant bliss of the complexities behind global supply chains.
But don’t take it for granted, we don’t know what is around the corner.
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