Sympathy for the shipping executive : Drewry
LONDON : Do not expect container lines to immediately return to Suez Canal transits after the Houthis say they will stop attacks on shipping. The return of Donald Trump is another wildcard for the market in a highly unpredictable year.
This year was always going to be highly unpredictable, but the range of possible outcomes in the container shipping world has spread even wider over the past few days.
Following the start of a ceasefire deal between Israel and Hamas that started 19 January , the Yemini militia Houthis swiftly issued a statement saying it will stop attacks on all non-Israeli-linked commercial shipping. The targeting of Israeli shipping will cease “upon the full implementation of all phases of the (ceasefire) agreement,” said the Houthis via email.
The Houthis also warned in the same message that attacks, or “sanctions” as they call them, would be re-instated “in the event of any aggression against the Republic of Yemen by the United States of America, the United Kingdom or the usurping Israeli entity.”
Since the Houthis started their campaign of terror on commercial shipping in November 2023 over 100 vessels have been attacked, two ship have been sunk, four seafarers killed and the 25 crew of the car carrier Galaxy Leader taken hostage. Transits of the Suez Canal have plummeted (see Figures 1 and 2) as the majority of shipping lines opted to re-route via the Cape of Good Hope rather than pay the Houthis for safe passage or arrange Naval escort from a supporting government.
This is clearly a positive development, but we should not expect to see container lines rush to return to the Suez Canal.
For a start, the Gaza peace deal has only just begun and can at best be described as “fragile”. Any breakdown will provide the Houthis with a justification to launch missiles again. Secondly, the Houthis could not be traditionally described as honest actors. Their promises do not carry any value and as their actions have proven to be extremely lucrative, in both monetary and influence terms, the motivation to suspend attacks has to be questioned.
Carriers will also be wary that they could be at risk if the Houthis deem their voyages to have any connection with Israel, no matter how tenuous or even false.
Lastly, the major carriers are about to start phasing in new East-West networks as part of a big change in alliance structures. They will not want to disrupt the operational transition only to then have to redraw them again should events take an unwanted darker turn.
In Drewry’s view most carriers will wait to see how things develop and will need to be utterly convinced that the threat of attack has been eliminated before they consider a return to trans Suez transits. This timeline would take months rather than weeks.
There is also the fact that carriers have done rather well during the diversions. Re-routing has sopped up a lot of capacity – Drewry estimates that it has reduced effective capacity by around 9% – which has helped carriers once again post some very strong quarterly profits in the past 12 months. The relationship between the diversions and carrier fortunes is well understood. Liner stock prices have taken hits whenever Gaza ceasefire talks have looked promising and already some major carriers are seeing downgrades from ratings agencies on the latest development.
A return to the Suez Canal will very quickly see carriers forced to address the underlying overcapacity that exists in the market, but which was masked to a large degree by the Red Sea diversions, by adding distance and time to voyages. An ordering frenzy for new container ships in 2021-22 (which recurred in 2024) has made the situation even more acute as those large capital investments are hitting the water and entering service.
Once carriers deem Suez to be a safe option – here insurance costs will be an important metric – we should expect to see lines set to work to cut capacity in an aggressive fashion. This will come in the form of far greater scrapping (barely 85 kteu of the 31 mteu fleet was scrapped last year), heavier use of blank sailings and even longer-term idling (at present only 2.6% of container ships have been anchored).
While we do think the market is drifting away from carriers and that freight rates are likely to decrease when the Suez Canal reopens fully, it has to be remembered that carriers do have the power to manage capacity in a variety of ways. For this reason, we consider there to be a floor below which carriers will not allow the supply/demand balance, and therefore rates, to fall precipitously.
As much as carriers can edit the supply side of the equation, they do not have any influence over demand, which has as many question marks hanging over it. The biggest wildcard is unquestionably the return to power of Donald Trump as US president.
He is promising hundreds of executive orders in the first week after his inauguration on Monday 20 January, including on the tariffs mooted during the campaign.
We shall soon find out to just out radical they will be, but for now the world has no clue as to the who, how much or when.
This is sub-optimal for a sector that by design craves predictability and multilateral coordination.
Drewry relies on third-party economic houses for such inputs and most are not expecting Trump to go to the extreme ends of his campaign rhetoric, and instead that he will adopt a slightly softer approach in relation to the number of countries (although all have China as the main target), duty increases and range of products affected.
More recent reporting suggests that a gradualist approach is being considered, essentially ramping up tariff increases steadily in time, rather than in one go, but again, it’s difficult to know what to believe as Trump deploys a ‘strategic ambiguity’ so you can never really know his true intentions.
The quickest route to tariffs would be for Trump to declare a national emergency, in which case Trump will have to identify a specific and compelling threat to national security and or economic stability.
Trump could say that the huge trade imbalances threatens the US economy and its ability to fund military operations, respond to crises, or compete globally.
He really hates the US’ trade imbalance, which as Figure 3 shows has gotten out of hand in recent years. The US has been running a goods deficits consistently since about the mid-1970’s – so for a good 50 years or so – but it really started ballooning around the start of the century as globalization and the outsourcing of manufacturing went into hyper drive.
As of November 2024, the US trade balance for goods was in deficit to the tune of about $1.1 trillion YTD. After 11 months of last year, for every dollar in exports there was $1.57 cents in imports.
In Trump’s mind, tariffs will close that gap, boost US treasury coffers as other countries will be forced to pay the higher duties – although that’s not how tariffs work – revive domestic manufacturing, add jobs, and make trading partners more acquiescent and negotiate more favourable deals for the US.
At the latest count the US had goods trade deficits with 107 countries and surpluses with 127.
Of course, we don’t know yet which countries will be targeted, but one assumption might be to look at those with the biggest deficits. As of November 2024 they were China ($270 billion), Mexico ($157bn) and Vietnam ($113bn).
The problem with this is that there is no telling which country might fall into his crosshairs. No country can be confident that it will escape Trump’s tariff radar.
For example, Denmark, which has a relatively small trade surplus with the US, could be a target for refusing to sell Greenland to America. Or Panama if it doesn’t give back control of the canal.
This is important because the impact from the 2018 round of tariffs was mainly to dilute China’s share of US imports and replace them with greater exports from places such as Vietnam, South Korea and Mexico.
But if those same replacement countries are also subject to tariffs, manufacturers will have limited options to avoid higher costs.
Drewry is apolitical, but we can see that raising the US effective tariff rate ten-fold to around 20% in a blanket worldwide policy – a level not seen since the Great Depression of the late 1920’s – represents a very big economic gamble.
There is a significant risk that this will backfire economically, resulting in not only more trade diversification and de-coupling from China, but also a slow-down or even reduction in container traffic worldwide.
At the same time it is hard to see how blanket tariffs can deliver on the objective of increasing US manufacturing and exports. US manufacturing also needs intermediate imports so their input costs are going to increase at the same time as becoming more expensive to the rest of the world to buy.
A move to blanket tariffs will dampen overall trade in the long-run, but there is likely to be some short-term gain as shippers front load cargoes to get ahead of deadlines.
We are already seeing that happen, but this could move up or down depending on how long a lead time there is before implementation. This also carries the risk of sudden demand surges and related port congestion issues, which will have an inflationary impact on freight rates on US-inbound trades.
Good luck with all of this, shipping executives!