As we close the first quarter of 2024, tensions in the Red Sea remain at fever pitch. On 6 March, 3 seafarers were killed in a missile attack on the MV True Confidence (50,448-dwt; built in 2011). The fatalities were the first in the ongoing assault on shipping by Yemen’s Houthi rebels. The region is further inflamed by the resurgence of Somali piracy activity. This was a prominent threat in the 2010s. On 12 March 2024, a Bangladeshi bulker, the MV Abdullah (58,068-dwt; built in 2015) was hijacked in the Indian Ocean with 23 seafarers taken hostage.
The dynamics can be viewed through the lens of “Volatility, Uncertainty, Complexity, and Ambiguity” (VUCA). These four points help to provide a geopolitical compass to navigate through choppy waters.
Volatility
While dry bulk freight rates in the first quarter of 2024 traded at elevated and impressive levels, is it inevitable that it would sustain the market performance throughout the year? It would appear that it is the case, if examine via first principles thinking.
Firstly, for the first time in shipping history both Panama and Suez Canals’ accessibility are materially impacted simultaneously for an extended duration and without a clear end in sight. For context, in 2023, combined bulker flows transiting both chokepoints stood at 8.0% of the total global dry trade volumes, just trailing behind the Singapore Straits (12.9%) and Taiwan Straits (20.0%).
The chaos that canal disruptions can induce, whereby its impact on dry bulk shipping is probably only matched by the recent memory of the unprecedented Chinese port congestion in 2021 (due to then restrictions on pilotage in the wake of Covid).
Secondly, it is imperative to make a clear distinction between immediate and aftermath impacts. The immediate impact would be the obvious boost to ton-miles. Laden vessels are rerouted and opt for longer transits via the Cape of Good Hope (COGH). For context, sailing at 12 knots, a ship’s voyage from the US East Coast to East Coast India via the Suez Canal takes 34-36 days. Whereas if it sails via the Cape of Good Hope the voyage duration extends to 44-46 days.
However, assuming full transits resume immediately, will everything simply return to business as usual? The likely reality is that decisions made by shipowners during the past months would result in unintended consequences, manifesting later.
From 3Q23 (when vessels began to reroute away from the Panama Canal) to date, ships circumvented the canal with the understanding that after discharging, it will also take much longer to ballast back to the prior loading areas than in previous years.
Meanwhile, incumbent ballasters are unable to promptly reposition themselves from the Far East to the US Gulf (via Panama) or from the Indian Ocean to the Mediterranean/UK Continent (via Suez). Shipowners now need to factor in higher ballasting costs that might deter/ delay them in directing vessels to other loading regions without prior commitment of fixed coverage.
The collective impact of such developments means that the efficient deployment of the bulker fleet across basins to meet any anticipated transportation demand is now practically unattainable. A sudden need to export a commodity out of key regions could be harder to satisfy. Hence, higher freight upside down the road is more likely than not to occur as positional demand/supply imbalances become more frequent.
Meanwhile, are there any potential downside freight risks? In the foreseeable future, employing asymmetric warfare, would we see a lull in Houthi assaults that encourage vessels to gingerly move back to the Red Sea, only for attacks to return abruptly, catching the shipping community unguarded?
In other instances, could freight rates / risk profile rise to an extent that makes it uneconomical / unpractical to source from distant regions? For example, recent shipments of Russian coal heading to India were reported to be loss-making due to higher freight expenses. Unlike the past 2 years whereby commodity prices in general stood at high levels, since the start of 2024, prices of dry bulk cargoes like iron ore, coal, grains have been weakening, putting a dampener on freight’s ceiling.
Meanwhile, the Chinese economy is not out of the woods. While overall dry imports volumes into China remain upbeat, we need to be wary that growth might taper in 2H24. On 1 April, iron ore prices slumped to their lowest levels in 10 months (below $100/t) as the construction material faced headwinds in the shape of a limp Chinese real estate market and a surge in steel supplies.
According to AXSMarine, during the first 12 weeks of this year, Chinese seaborne import volumes totaled 482 mln mt, at pace with last year 480 mln mt.
Additionally, there have been unforeseen accidents, notably the bridge collapse in Baltimore, temporarily paralyzing coal trades ex-US East Coast. This has seen Capesizes and Kamsarmaxes released back into the North Atlantic market just as dry freight rates are taking a breather in the last 2 weeks of March, thereby pressuring freight rates lower heading into the second quarter.
Uncertainty
Second-order consequences (a series of cause-and-effects) meant we cannot naively extrapolate into the future solely on existing circumstances. As mentioned in our Weekly Newsletter issue #105, 29 February 2024, by the end of last year certain operational challenges were not contemplated, but these reared their heads after end-January.
To quickly recap, these challenges include the withdrawal of re-insurance players for High-Risk Areas (HRA), the granting of crew’s right to deny transit by the International Bargaining Forum and the return of Somali piracy around Horn of Africa. Considering the first seafarer death in the Red Sea, this could see some seafarers staunchly refuse transits despite incentives, citing physical and mental welfare.
Meanwhile, success begets success, though the wrong kind this time. The success of the Houthi’s attacks has emboldened them to expand their assault range. On 14 March, Yemen's Houthi leader Abdul-Malik al-Houthi, in a televised speech, declared the militant group will widen its assault on Israeli-linked ships beyond the traditional Red Sea and the Gulf of Aden areas, vowing to target vessels passing through the Indian Ocean towards the COGH. Whether and when such a move would be implemented remains undetermined.
In addition, it was reported that Very Large Gas Carriers (VLGC) that had previously shifted away from the Panama Canal because of weather-related restrictions are returning because alternative Red Sea routes have been shut off by the Houthi attacks. Panama slots are either booked in advance (scheduling prerequisites) or secured by auction (highest bidder wins), which are at odds with the tramp* and lower-valued** commodities transported by bulkers. This implies that dry bulkers might continue to avoid the Panama Canal for the foreseeable future despite total transits are expected to rise in 2H24 as the rain returns to replenish water levels. * Tramp service does not have a fixed schedule or route; goods can be on and offloaded at any port.
** Canal fees as a percentage of cargo value. Containers, LNG, LPG are generally of higher value than coal, grains etc and they can easily outbid bulkers for slots.
The interplay between various factors (be it causes and effects) suggests linear thinking in a nonlinear setting is often the reason why shipping personnel tend to under/over-estimate how the situation could evolve and implicate themselves, especially for those who are slow to react.
Complexity
There is a labyrinth of interconnected events and actors (Israel-Hamas conflict / Iran financial backing of Houthis / US sanctioning of Iran etc) that impact here. The trickier part is that we also face complexity when trying to remedy the situation.
In a way, the Red Sea crisis could be framed as a longer-term symptom of the ineffectiveness of American foreign policy to guarantee freedom of navigation. For example, US politicians focus on domestic issues (notably November’s upcoming Presidential election) and divergent views on the US’ role and level of commitment in different regional conflicts.
It does not help that the Biden administration’s credibility on military operations/deterrence efforts is somewhat soiled by a list of mishaps including the 2021 chaotic handling of the Afghanistan evacuation. Recently, it was reported that Washington had urged Ukraine to halt attacks on Russia’s refining infrastructure, fearing that it risked driving up oil prices. The net effect of this apparent ‘indecisiveness’ is that conflicts and tensions are dragged out rather than being settled quickly.
More importantly, there’s the conspicuous absence of consensus and coordinated action amongst the international community to stem regional conflict and restore order. This is in stark contrast to 2011, when all 5 members of the UN Security Council actively participated in anti-piracy naval operations.
There remains a silver lining amidst the sea of negativity. The Indian Navy, acting as a first responder, has stepped up its game by rescuing 17 crew members of the 41,607-dwt MV Ruen (built 2016), three months after it was hijacked off Somalia. The Somalis were using the Ruen as a "mother ship" to launch attacks on other vessels. The question ahead is whether there is enough security support from other nations.
While geopolitics is a realm beyond the control of shipowners and charterers, it does pay dividends to understand the underlying currents shaping various macro trends.
Ambiguity
The past few months have demonstrated that the Houthis had acted on incomplete, inaccurate, outdated information and loose interpretation to target ships. The diverse nature of owning, operating, trading, financing, insuring of a single vessel means that almost any connection to the US and UK can be made.
When the checklist of targets is ambiguous and easily tweaked to fit the changing needs of a militant group, what constitutes best vessel management practices can be thrown into doubt. On the other hand, both charterers and carriers can craft the most watertight set of clauses to provide explicit guidance on the allocation risk and responsibility when transiting through the HRA. In the event of real, substantive damage and losses, experience tells us there will still be disputes to be debated.
Ceasefire talks regarding Israel-Hamas conflict, the justification of Houthi attacks, appear to have ground to a halt amid differences on the duration and nature of a truce and exchange of Palestinian prisoners and Israeli captives. Furthermore, a truce was thrown into further doubt by the 2 April alleged attack by Israeli warplanes on Iran’s embassy in Syria, thereby marking a significant escalation in Israel’s conflicts with its regional adversaries. And even if a truce is ultimately achieved, would the Houthis simply stop attacking?
Moreover, the international community had been bombarded by inconsistent information, clouding and challenging risks assessments. In the last few months, Houthis have made claims that they had attacked specific ships only to be refuted later by official sources. On the other hand, quoting anonymous sources, Bloomberg reported that Yemen-based Houthis have offered assurances to China and Russia their vessels can sail through the Red Sea and Gulf of Aden without being attacked. Just 2 days after this report, on 23 March, a Chinese-owned oil tanker, MV Huang Pu was attacked by Houthis’ missiles.
Back to Reality
To speak realistically, unless there are effective military intervention within Yemen or a sudden change of heart by all affiliated parties in the Israel-Hamas conflict, any measures to mitigate the Red Sea crisis might be akin to an attempt to un-tie the proverbial Gordian Knot. While nothing is certain, the likelihood of instability in the HRA extending to the rest of 2024 should be contemplated.
Under such key assumptions, a bifurcation of strategies by shipping players regarding Red Sea transits would be a probable norm.
