Freight rates on China exports soar amid Red Sea crisis

SINGAPORE (ICIS)–Freight rates for China’s exports, including petrochemicals, have been spiking in recent weeks and are expected to remain firm in the next three to six months on the back of improving overseas demand and amid continued logistics disruptions in the Middle East.

• Geopolitical tensions translate to higher shipping cost, longer delivery time
• Container shortages intensifying in China
• Freight rates to remain firm on strong western demand

Most ocean carriers have halted transits in the Red Sea, which is the fastest shipping route between Europe and Asia, fearing missile attacks by Yemen’s Houthi rebels.

They have opted to take the longer route via the Cape of Good Hope, resulting in much longer time and costs for moving cargoes to their destinations.

The Red Sea crisis is showing no signs of de-escalation, with the latest casualty being the Panama-flagged oil tanker M/T Wind bound for China, which was struck by a Houthi-launched ballistic missile on 18 May.

Logistics and supply chain disruptions are expected to continue.

Dutch shipping giant Maersk had said on 6 May that its vessels have been forced to lengthen their journey further because of the expanded risk zone and attacks reaching further offshore in the Rea Sea.

“The knock-on effects of the situation have included bottlenecks and vessel bunching, as well as delays and equipment and capacity shortages,” the company had said, estimating an industrywide capacity loss of 15-20% on the Far East-to-North Europe and Mediterranean market during the second quarter.

CONTAINERS/VESSEL SPACE IN SEVERE SHORTAGE
As carriers now need longer time to come back from destinations, the resulting severe shortage of containers and vessel space was triggering sharp spikes in freight rates.

From Shanghai to the US west coast and the US east coast, freight rates on 17 May jumped to $5,025/forty-foot equivalent unit (FEU), and $6,026/FEU, respectively, up by 14.4% and 8.3% week on week, according to the Shanghai Shipping Exchange.

To South America from China’s financial capital, the shipping cost increased at a sharper rate of 22.4%, while to Europe, freight rates rose by 6.3%, the data showed.

A shipping broker said that China-to-Europe freights have been soaring by $500-$800/FEU each week since late April, while a polypropylene (PP) trader noted that the rates to West Africa more than tripled to $8,000/FEU, more than a fourfold increase from $1,500-$2,000/FEU rates in early April.

“We now need to wait 10-15 days for booking containers. We face severe stockpiling and warehouses are flooded with cargoes waiting for shipment,” said a marketing manager of a Shenzhen-based logistics company.

A plastic bag factory in east China is currently stuck with high inventories and risk suspending production, a source from the company said

For vinyl acetate producers, a shortage of shipping tanks prevents them from exporting more cargoes, providing them with the less-efficient means of bulk shipments with other products as the only alternative.

ROBUST WESTERN DEMAND SUPPORTS FIRM RATES
The recent spike in freight rates came as a surprise to players in the petrochemical industry as the May-June period is normally a lull season for Chinese exports.

Besides the Red Sea crisis, strong demand coming from the west underlies the recent surge in freight rates.

“July-September is the peak season for China-to-West shipping. With [the] destocking last year, Europe and US markets demand are expected to rise substantially before the Christmas [season in December],” said Wang Guowen, director of Shenzhen Logistics and Supply Chain Management Research.

“Plus, Europe and UK central banks are expected to cut interest rates, which will further stimulate consumptions there,” he added, noting that demand from both Europe and the US will remain strong rest of the year.

This will continue to buoy up shipping rates, which are projected to hover at high rates over the next three to six months, industry sources said.

On 16 May, Maersk announced a hike in peak season surcharge (PSS) for major east-to-west shipping lanes, including the China-to-Dar es Salaam, Tanzania route, PPS for which increased to $1,500/FEU since 20 May.

Meanwhile, French shipping and logistics major CMA CGM plan to hike its Asia-to-northern Europe freights to $6,000/FEU, effective 1 June.

Current container production in China could not catch up with strong demand.

New China-manufactured containers to be delivered before late June have been sold out, a source at domestic logistics company said.

Wang of Shenzhen Logistics and Supply Chain Management Research, however, noted that the present container shortage is not about undersupply but more about the sharp slowdown in turnover amid the global logistics disruptions.

Tight shipping conditions are expected to prevail in the third quarter as demand is expected to peak, with a gradual easing of freight rates likely in the fourth quarter, he said.

Focus article by Fanny Zhang

Additional reporting by Joanne Wang and Lucy Shuai

Thumbnail image: At the container terminal of Yantian Port in Shenzhen City, Guangdong Province in south China, 16 May 2024 (Shutterstock)