Rising freight costs, container shortages paralyse global trade recovery

Red Sea crisis causing global shipping disruptions reminiscent of those seen during Covid-19 pandemic

The global shipping industry is experiencing disruptions similar to those seen during the Covid-19 pandemic, significantly affecting various sectors. Spot freight rates have surged by approximately 105 per cent in the last three months, and a severe container shortage is impacting industries ranging from agriculture to automotive, according to a report by The Economic Times.

Supply chain issues have been exacerbated by the Red Sea crisis, which has also disrupted food shipments. JSW Infrastructure anticipates some relief from rising freight rates within 4-6 weeks, while Adani Ports and Special Economic Zone (APSEZ) forecasts continued challenges throughout the coming season.

According to Drewry’s World Container Index (WCI), spot freight rates have climbed to $5,806 per 40-foot container as of July 25, although this is still lower than the pandemic peak of $10,377 per 40-foot container in September 2021, the report claimed.

Companies report that the high consumer demand, supply chain disruptions, and equipment shortages are reminiscent of the pandemic. The auto sector is particularly affected by the container shortage.

The business daily cited Rakesh Sharma, executive director of Bajaj Auto, on the severity of the current situation. He noted, "In the last six months, freight rates to most destinations in Latin America and Africa have doubled. Availability of containers is also an issue." Bajaj Auto exports to nearly 100 countries across South Asia, Southeast Asia, Africa, and Latin America.

Meanwhile, Tyre manufacturer CEAT experienced a 3-percentage-point decline in profit margin in the June quarter due to increased input costs. The rising prices of natural rubber, critical raw material for tyre production, have particularly impacted the company, as India imports half of its natural rubber needs. Higher freight and container rates have further exacerbated the situation, the report added.

The Shanghai Containerised Freight Index (SCFI), which tracks container freight rates from China to global markets, including India, tripled to around $3,700 per twenty-foot equivalent unit (TEU) last month from approximately $1,000 per TEU before the Red Sea crisis. 

India relies heavily on the Suez Canal for 35 per cent of its foreign trade with Europe, North Africa, and the Americas, predominantly in containers. The Red Sea crisis has forced ships to reroute around the Cape of Good Hope, increasing freight rates and insurance premiums.

The foodgrain and perishable goods sector has also been disrupted, affecting low-value freight, which accounts for 10 per cent-15 per cent of total volumes. Maulesh Desai, director at CareEdge Ratings, predicted an 8 per cent growth in container volumes to 342 million metric tonnes during this financial year. However, he believes that rising shipment costs are further eroding already thin profit margins.

Ajay Sahai, director general of the Federation of Indian Export Organisations (FIEO), stated that exporters, especially those dealing in fashion apparel, footwear, and high-value perishables, are shifting to air cargo due to the maritime impact. This shift is causing a demand-supply mismatch in the air cargo segment, with insufficient freighters to meet the demand surge and delays in cargo pickup. Companies have different opinions on when the situation will improve.

What is the Red Sea crisis?

Since November last year, Houthi militias in Yemen have carried out multiple attacks on cargo ships in the Red Sea. This area, the fastest marine route connecting Asia with Europe via the Suez Canal, has become increasingly unsafe. Consequently, freighters are now taking the longer route around the Cape of Good Hope at the southern tip of Africa.

This detour has increased both shipping costs and delivery times, exacerbating the challenges faced by global trade, which is still recovering from the pandemic, the Russia-Ukraine war, and a global economic slowdown.

The Red Sea, vital for 30 per cent of the world's container traffic, is currently in the midst of an unprecedented shipping crisis. The recent conflict in West Asia has led to attacks on commercial vessels, significantly reducing maritime activity. By the end of March 2024, traffic through the Suez Canal and Bab El-Mandeb Strait had decreased by 50 per cent, while navigation via the Cape of Good Hope had doubled.