Lars Jensen, principal at Vespucci Maritime based in Copenhagen, Denmark, says there is a shift of some East and Gulf Coast cargoes going back to the U.S. West Coast.
Jensen spoke to AJOT at the TPM conference taking place at Long Beach, California produced by S&P Global.
The added factor has been delays at the Panama Canal due to low water related to prolonged drought and attacks against shipping accessing the Suez Canal.
Jensen noted that the Red Sea crisis is causing carriers to avoid the Suez Canal and sail around the African continent which has boosted ocean carrier revenues and prevented the idling of vessels. Once the Suez Canal reopens, there will be a decline in carrier revenues.
Shifting Box Volumes Back To West Coast
Jensen explained: “If you look back to November last year before the Suez Canal disruptions, you already had some of the Asia to U.S East Coast services through Panama, being switched to Suez due [to] low waters in Panama. That added about a week of extra transit time to do that … Going around Africa only adds four to five days but that's four to five days on top of that additional week… It does give an advantage going through the West Coast, but it comes on top of the other factors that were shifted to West Coast anyhow. You had a lot of cargo that naturally belongs to the West Coast that had shifted to the East Coast because of all the congestion issues that was going to shift back … Now you have the concern over the ILA labor negotiations, which on its own would also prompt a shift over to the West Coast…So, the whole Panama situation where you then go to Suez and now around Africa is just one more element on top of the other ones.”
Panama Canal Prospect
The low water problems hindering transits “are going to last at least until summer. You're now getting into the dry season. So, they're not going to get any more water now. I mean, under normal seasonal variations, you reach the low point in May. So, this is just going to get worse. That's predictable. Whether it will then pick up again, that depends on whether the El Nino weather phenomenon stops. Usually [El Nino] lasts one, two or three years. We're now into year two. Nobody knows whether it's going be one, two or three years. If it goes away, then situations should be normalized towards the end of the year or it’s going to get worse.”
Red Sea Conflict Benefits Ocean Carriers
Jensen said for the ocean carriers “the Red Sea conflict is a blessing in disguise. I mean, most of them were heavily loss making in Q4 because of overcapacity and plummeting rates. And had it not been for the Red Sea, they would be even more loss making here in Q1. My baseline assumption before the Red Sea crisis would be freight rates would bottom out here in late Q1, early Q2, which would then cause the carriers eventually to idle vessels just like you saw during the financial crisis to stabilize the market …. Now, of course, that's not happening. Every ship that can sail is needed. We have enough to go around Africa, but only just, and that's of course why now the carriers are going to be more profitable again here in Q1. That also means as long as we go around Africa, that helps the carriers because it means all vessels are utilized. The moment we go back to Suez, spot rates are going to go into free fall very rapidly.”
Suez Canal Impact On Africa
Jensen said that disruptions in the Suez Canal are having a serious impact on African countries such as Sudan and Ethiopia: “Sudan is in the middle of a horrible civil war, and you already have NGOs in the countries saying that relief supplies for food for medicine are not arriving because it's been detoured all the way around. This already has an impact there. But what really worries me is Ethiopia. Ethiopia is landlocked. It has to be serviced basically through Djibouti. Now you don't have to go through the Red Sea to go to Djibouti, you just go through the Gulf of Aden. Yesterday an MSC ship was impacted by a missile in the Gulf of Aden …You already, over the past month and a half, have seen freight rates increase dramatically, to go into Djibouti because of the risk area. So here you have Ethiopia, one of the poorest countries in the world. Now their imports are getting much more expensive because of this. It's going to be more expensive to export. So, they will be less competitive. So, you take … million of the poorest people in the world, you make them even poorer. This definitely increases the risk that you're going to completely destabilize Ethiopia. You already have their neighboring countries that been destabilized such as Sudan … Ethiopia is the largest and last country not to have, be destabilized there.”
Trade Shifting Away From China
Jensen said that so far, the effect of tariffs by the Trump administration have not had a serious impact on trade with China because China has shifted some cargoes through Mexico. Even so, there is some evidence of a shift to countries such as Vietnam and India. Jensen said the tariffs “just caused that trade to be diverted through third parties, for example, down to Vietnam or through Mexico. I mean, just because trade shifts, you don't magically have thousands of factories appear somewhere else …. The other thing that you definitely are seeing, have been seeing for a couple of years, is an increase in manufacturing in the Indian subcontinent. And it's not because people are shutting down in China, but it's when they need new sourcing, it's not going to be placed in China. That is why India subcontinent is beginning to grow. So, this is a long slow shift. China is getting somewhat more expensive than India. And think of India as being where China was 25 years ago. India is still difficult to do business in and infrastructure is not that good. But neither was China 25 years ago. And yes, China is becoming more expensive. That's one factor, right? But increasingly there is also this concern. If you are exposed only to China, what happens if there is a larger confrontation with China? What happens if the U.S. ramps up? … So, it's a matter of also trying to build some more resilience into the supply chain.”
One effect, he says, is: “If you look before the Red Sea crisis, you had a couple of [ocean container] carriers that now began to set up direct services from India to U.S. East Coast.”
Jensen said the shift “is also going to increase Vietnam and Indonesia trade and so they are also part of the beneficiaries of this.”
