NEWS

RED SEA CRISIS- Freight Cost Increases 2024

In recent times, the global transportation market has been in turmoil due to the tense situation in the Red Sea region. This has not only led to a sharp increase in freight rates but also had profound implications for the global supply chain landscape.

Ocean freight rates continue to rise As major international shipping companies adjust their routes strategically, the dual pressures of longer transit times and reduced capacity have led to a significant increase in ocean freight rates. According to the Shanghai Containerized Freight Index (SCFI) by global logistics company DSV, in just a few weeks at the end of 2023, the cost of shipping a 20-foot standard container from Shanghai to Europe skyrocketed from over $1,000 to nearly $2,700. By the first week of 2024, the SCFI had seen a notable increase, rising by 137.07 points to 1896.65 points compared to the previous week, with a weekly increase of 7.79% and a staggering monthly increase of 83.75%.

Under the current market conditions, container shortage has become a prominent issue. According to a freight forwarder on January 5th, the capacity for the first half of January had already been fully booked, with only a few shipping companies updating their quotes for the latter half of the month. As the end of the year approached, many Chinese foreign trade companies were eager to ship their goods for early receipt of payments, potentially exacerbating market supply-demand imbalances, leading to a situation where “finding a container is difficult.” The latest quoted data indicates that freight rates in the latter half of January are expected to continue to rise compared to the first half, with small container rates increasing by approximately $600 and large container rates by around $1,000, resulting in an overall increase ranging from $500 to $1,000. The freight forwarder further pointed out that by the latter half of January, small container rates on European routes had risen to $3,150/TEU, while large container rates had reached $6,050/FEU, almost doubling from the end of December last year; on Mediterranean routes, small and large container rates had increased to $4,400/TEU and $6,250/FEU, respectively, representing an increase of approximately 1.2 to 1.3 times.

On January 3rd, freight forwarding giant DHL noted in its market dynamics report for the first half of January that, against the backdrop of ongoing tension in the Red Sea region, it is expected that freight rates will remain at high levels until mid-February, with the possibility of further increases. Especially on the China to Europe and Mediterranean routes, in the first half of January, shipping companies generally raised the basic port-to-port rates for large containers to $4,500-5,000/FEU towards Europe, while large container rates for the west Mediterranean route were adjusted to $5,000-5,500/FEU.

Supply chain disruptions: Pressure on enterprises In the global trade’s cross-border industrial chain, each link is closely connected, and once one link is obstructed, it will have a chain reaction on the upstream and downstream. The Red Sea shipping incident has once again put some small and medium-sized foreign trade enterprises in the dilemma of logistics disruption. Due to the soaring comprehensive logistics costs such as container costs, both buyers and sellers are under immense pressure. In the Free on Board (FOB) pricing mode, the risk of rising shipping costs is mainly borne by the customers, which may lead to buyers reducing their purchase volume due to freight pressure, indirectly affecting the order situation of export enterprises.

In the Cost, Insurance, and Freight (CIF) settlement mode, although the seller bears the logistics costs, the high costs will eventually be transferred to the buyers in other ways, such as adjusting the selling prices of goods by the seller. For small and medium-sized enterprises, the continuously rising freight rates undoubtedly increase their operational pressure. Currently, there is a serious imbalance between the value of a container of goods and the freight, with freight costs in some cases approaching the value of the goods themselves. Faced with the ongoing shipping crisis, European buyers may resort to extreme measures: firstly, goods may not be shelved for sale on time, leading to abandoned goods, order cuts, or reduced demand; secondly, some buyers who do not have the habit of stocking up in advance may temporarily increase purchases to meet short-term demand growth. Both situations disrupt the original production and shipment rhythm of enterprises.

The Red Sea incident has posed a severe test to the global supply chain, and Chinese suppliers are facing unprecedented transportation challenges. However, behind the crisis also lie various opportunities. Chinese foreign trade enterprises should make reasonable use of alternative solutions, flexibly choosing and integrating various transportation methods such as railways, air freight, and multimodal transport according to different logistics needs, especially in urgent situations, selecting more reliable and efficient transportation routes to ensure rapid delivery of goods to their destinations. Through flexible adaptation, advanced planning, and diversified supply chain layouts, Chinese foreign trade enterprises not only have the opportunity to find new opportunities in this turbulent transportation market but also can create greater value for customers with high-quality services!

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