Global trade woes mount as shipping costs rise

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The significance of the Red Sea shipping route for global trade is enormous. But for over six months now, Houthi militias from Yemen have been attacking ships sailing in the region which they associate with Israel due to their owners or operators. The attacks have come in the wake of Israel’s war against the Hamas militant group in Gaza following its massacre of Israeli citizens on October 7 last year.

The Houthis, who have sided with the Palestinians in the current Middle East conflict, sank a coal transporter with a drone strike on June 20.

Responding to the Houthi attacks, US and British military vessels have repeatedly targeted militia positions in Yemen over the past months. Additionally, warships from two international coalitions are operating there to secure maritime traffic along the Yemeni coast. The German Navy, for example, is also part of an EU naval mission called Aspides.

Shipping costs are rising again

Global trade has been under immense pressure since last October when the Israeli-Hamas war broke out. Worldwide, commercial trade is facing higher freight costs and increased expenses for insuring goods.

Shipowners are confronted with higher insurance premiums as the risk of losing a vessel has dramatically increased especially in the Red Sea. Moreover, moves to avoid the Suez Canal for safety reasons and instead navigate around the Cape of Good Hope, have increased travel times and led to higher fuel consumption.

The Drewry World Container Index, which monitors the freight market, has recorded an increase in shipping prices for a 40-foot standard container by 7% only within the third week of June — up by a staggering 233% compared with the same month a year ago.

Searching for safer routes

Simon MacAdam, an analyst at London-based financial consulting firm Capital Economics, says shipping companies are forced to become more flexible.

“The shipowners have seemingly adapted quite well to the situation, considering the limitations on using the Suez Canal,” he told DW, adding that costs briefly dropped in spring “after skyrocketing in January.”

Now though “they are starting to rise again” showing there is no reason to expect any relief on costs.

“Another driver seems to be that importers are currently bringing forward many orders to ensure they have enough goods in stock throughout the year. But with ships being rerouted around the Cape of Good Hope further price spikes are more likely,” the Capital Economics expert said.

The Cape of Good Hope trade route means that ships have to circumnavigate the entire African continent before reaching EuropeImage: Christopher Tamcke/imagebroker/IMAGO

More ships needed

Jan Hoffmann, a trade expert at the United Nations Conference on Trade and Development (UNCTAD), also blames longer travel times around Africa for rising costs.

“The detour around South Africa requires more ships to maintain supply. The average travel distance for a container in 2024 is 9% longer than it was in 2022,” he told DW.

As ships spend more time at sea, more shipping space is needed, he said, meaning shipping companies have to charter or buy more ships and hire more personnel. “And since these ships do not yet exist, freight prices will rise.”

Hoffmann also pointed to another unwelcome effect of longer shipping routes: greenhouse gas emissions. “Ships have increased their speeds which has led to a rise in emissions, for example, by 70% on the Singapore-Rotterdam route.”

Trouble in Central America

Apart from safety concerns, global trade is also currently inhibited by low water in the Panama Canal, said Hoffmann, which means the waterway cannot be fully utilized. As a result, US shippers must integrate what he calls a “land bridge” into their sea routes with East Asia meaning that they have to transport goods by rail or road from West Coast ports to those on the US East Coast.

Slowly but gradually water levels and shipping are coming back to normal on the Panama Canal routeImage: Hady Khandani/JOKER/picture alliance

Shipping bulk commodities like wheat or liquefied natural gas (LNG) across the US is economically unviable, he added, so a very long and dangerous detour via the “alternative route around Cape Horn,” — the southern tip of South America — must be taken.

At least as far as a return to normal Panama Canal shipping is concerned, Simon MacAdam sees some light at the end of the tunnel. Water levels in the canal, he told DW, have “recovered somewhat” in recent months, and the La Nina weather phenomenon should “further ease the situation soon.” A slight rise in water levels in the Panama Canal has already increased freight transport there, he added.

Houthis vow attacks until Israel ends war in Gaza

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Red Sea to stay dangerous or ‘even worse’

According to Bloomberg, around 70% of trade on the Red Sea is still avoiding the waterway and navigating around Africa.

Simon MacAdam believes that a prolonged crisis could overwhelm shipping companies and significantly boost freight rates further.

“Building ships takes many years, and new containers are 90% built in China. Higher capacities cannot be achieved overnight,” the Capital Economics expert told DW, warning that the crisis in the industry could get “even worse.”

This article was originally written in German.