Red Sea Repercussions/Uncertainty Add to Container Shipping and Labor Costs

The repercussions continue to mount a week after the major carriers began announcing that they would be rerouting and suspending service through the Red Sea and Bab el-Mandeb Strait after rockets and drones were launched against containerships. Carriers have now begun to announce hefty surcharges that will be added to their shipments to reflect the longer routing and disruption across their fleets while the trade group responsible for the industry’s collective bargaining agreement has decided to implement a high-risk area, raising labor costs for any of the shipping lines still entering the zone.

“The massive spike is already here,” highlights well-known industry analysts Peter Sand of Xeneta, following their forecast that rates could increase 100 percent following Houthis’ missile attacks on merchant ships. Xeneta is reporting that container prices between the Far East and the Mediterranean are up 25 percent per FEU week-over-week.

“Ocean freight carriers are desperately trying to recoup the cost of sending vessels from the Far East to the Mediterranean, North Europe, and U.S. East Coast via the Cape of Good Hope rather than heading through the Suez Canal,” says Sand. The rerouting is expected to length the trips by as much as a third with up to 10 to 14 days added to a typical trip between Asia and Northern Europe which took about 27 days. Then, there are concerns about the fuel supply and bunkering capabilities to handle the onslaught of vessels likely to be rerouting. 

Major carriers such as Maersk, CMA CGM, and Hapag-Lloyd all began releasing long lists of rerouted voyages stretching well into 2024. Hapag posted an online listing showing more than 50 trips, while CMA released a list of 22 voyages and Maersk followed with a detailed alert to customers showing an impact on 15 routes. Maersk also released an update saying that it was not accepting any new bookings to/from ports from/to Asia, the Middle East, Oceania, East Africa, Indian Subcontinent, and Indian Ocean islands including the large operations both at Jeddah and the King Abdullah Port in Saudi Arabia.

Maersk also announced late on Thursday that it was imposing a broad schedule of surcharges on its services citing the “severe operational disruption,” as a result of the needed changes. They are implementing both a “Transit Disruption Surcharge” and a peak season surcharge on routes. It can be as high as $700 for each TEU between China and Northern Europe and $500 for services to the east coast of the United States. Maersk is also planning an “Emergency Contingency Surcharge” starting January 1.

Other major carriers are following suit with a range of new surcharges. MSC late on Wednesday rolled out surcharges ranging between $600 and $2,000 per FEU. CMA CGM followed suit on Friday and later Hapag-Lloyd also released its schedule for surcharges.

The rush to implement these surcharges is also triggering concerns among the regulators. Yesterday, the U.S. Federal Maritime Commission (FMC) released a statement saying “The Federal Maritime Commission is monitoring actions taken by ocean common carriers related to rates, fees, and surcharges to ensure their compliance with all statutory and regulatory requirements.” They warned that the charges must meet strict legal requirements, while also saying competition among carriers must not be suspended.

“Sadly, seafarers are often at risk when there is war and global disruptions,” said Toshihito Inoue, who serves as chair of the Joint Negotiating Group, which represents the views of employers across the maritime world. He highlighted the growing concerns among the labor groups and the discussions among the International Bargaining Forum’s Warlike Operations Area Committee.

Effective today, the International Bargaining Forum, which is responsible for the industry’s largest collective bargaining agreement, announced it was officially designating the southern section of the Red Sea and the strait as a High Risk Area. This means that seafarers transiting the area and covered by the IBF agreements are entitled to a bonus equal to their basic wage for the duration of the transit. There are also mandatory requirements to increase security arrangements and the agreement requires double compensation for any seafarer disability or death in the HRA.

“As an employers’ association, it was important for us to reassure seafarers who may be at additional risk in the area that they have appropriate coverage,” said Capt. Belal Ahmed, Chair of the International Maritime Employers’ Council and a representative on the Joint Negotiating Committee. “We will also continue to lobby governments to step up their efforts in the region.”

These steps come as the shipping industry continues to wait and watch how the U.S.-led coalition will come together. A Pentagon spokesman highlighted that more than 20 nations have signed on to participate, but the industry is looking for more clarity and action. So far, Air Force Maj. Gen. Pat Ryder addressing the questions at a Pentagon news conference on Thursday said Operation Prosperity Guardian, will serve as the highway patrol in the Red Sea and the Gulf of Aden “to respond to and assist as necessary commercial vessels that are transiting this vital international waterway. It’s a defensive coalition meant to reassure global shipping and mariners that the international community is there to help with safe passage.”

While rates are already spiking due to the uncertainties and rerouting, Xeneta warns it will not be limited to just the routes directly impacted by spillover into all parts of the system. 

“The spike in rates is already here as a result of the Suez Canal diversion, but with Chinese Lunar New Year also on the way and the traditional increases in demand that brings, the cost of ocean freight shipping could grow even more dramatically,” concludes Peter Sand.