Freight on the Red Sea route soars, and China's polyester exports to North Africa stagnate

Recent developments in the Red Sea have gained global attention, with many shipping companies announcing suspensions of service or a halt in offering new slots. Previously, the four major container shipping giants in Europe had all suspended services that required passing through the Red Sea route. As a result, shipping costs between Asia and Europe, as well as between Asia and Africa, have significantly increased in the short term. The current freight cost for a 20-feet standard container from China to North Africa has risen to around $3,500, an increase of several hundred dollars compared to before. However, shipping companies are actually unable to provide available slots, and their pricing adjustments are mainly opportunistic. Even if factories are willing to accept the higher rates, it does not necessarily guarantee the availability of slots.

Historically, disruptions in the Suez Canal have led to longer shipping distances and higher prices. In March 2021, the grounding of the MV Ever Given in the Suez Canal caused a six-day blockage, resulting in significant losses. Therefore, it is important to assess the potential impact of the "Red Sea Crisis."

The Red Sea-Suez Canal route is one of the busiest shipping routes in the world, with approximately 12% of global cargo transportation passing through the Red Sea and the Suez Canal. The recent suspensions of Red Sea navigation by the four international shipping companies (Germany's Hapag-Lloyd, Denmark's Maersk Line, Mediterranean Shipping Company, and France's CMA CGM) account for 53% of global container trade volume.

When the Red Sea route is blocked, many vessels have no choice but to detour around the Cape of Good Hope. However, if vessels take the Cape of Good Hope route, it is estimated that they will have to travel over 8,000 nautical miles, adding an additional 7-10 days to the journey. Detouring around the Cape of Good Hope not only increases shipping costs but also introduces more risks and unpredictability to navigation safety and supply chain security. It has been reported that war risk insurance rates have increased to 0.1%-0.15%, with some rates rising to 0.2%. If the Red Sea security crisis is perceived as a threat to shipping in the nearby Arabian Sea, the economic consequences could be even greater, as one-third of global maritime oil transportation passes through the Arabian Sea.

Regarding polyester product exports, in 2022, China's annual export volume of polyester products to North Africa was around 630,000 tons, accounting for approximately 6.8% of China's total polyester exports. In terms of products, PET bottle chip and polyester filament yarns account for 49% and 46% respectively. Due to the escalation of the Red Sea situation, shipping from China to North Africa has been mostly suspended. Additionally, the Middle East has increased polyester production capacity in recent years, and demand from Europe and the Americas has slightly weakened. Since 2023, China's exports to the region have also decreased, resulting in weaker transit hub functions. The impact of shipping costs from this situation is relatively limited. If the suspension of navigation continues, many ports and channels will experience congestion, leading to additional detour costs. There may be a temporary shortage of shipping capacity, disrupting the supply-demand balance and possibly resulting in a surge in freight rates similar to 2021.

From the current situation, congestion and stagnation in the Red Sea-Suez Canal route mainly arise from the spillover risks of the Israeli-Palestinian conflict, which is more of a political game. Therefore, the impact and duration of this "Red Sea Crisis" may far exceed the previous Suez Canal blockage, and it is difficult to determine the current duration. The end of the year will experience an increase in cargo transportation demand, and if the situation in the region further deteriorates, vessel detours or suspensions will have a significant impact on the global supply chain. Furthermore, the congestion in the Panama Canal due to drought has been ongoing for several months, forcing many vessels to take detours, gradually increasing global shipping costs. Whether a proper solution can be found in the future is also a focal point of concern.