Navigating the new normal: Vessel rerouting spurs higher emissions as ships avoid the Red Sea
In recent weeks, the Red Sea has become the epicenter of heightened tensions as Yemen’s Houthi group escalated their attacks on commercial vessels, sending shockwaves throughout the maritime industry.
Germany’s Hapag-Lloyd and Hong Kong’s OOCL joined on Thursday numerous shipping companies, including Maersk, MSC as well as oil major BP, in announcing that they would stay clear from the Red Sea due to safety concerns for their seafarers and their shipping assets.
The decision came on the heels of numerous drone and missile attacks on commercial ships in Bab al-Mandeb Strait and the Gulf of Aden.
It is estimated that between 10 and 15 % of global shipping flows through the Red Sea, making it a vital link for commercial goods, including seaborne oil and LNG. What is more, some 40% of Asia-Europe trade passes through the Red Sea.
In the aftermath of dozens of attacks on commercial vessels in the Red Sea, shipping companies are reevaluating routes, adjusting pricing models, and adapting strategies to cope with the most recent security challenges.
Data from West of England Protection & Indemnity (P&I) Club indicates that approximately 55 ships belonging to major shipping lines have diverted to cross the Cape of Good Hope on Africa’s southern tip. Such a diversion adds around 3,000 nautical miles and days (if not, weeks) to the sailing times of vessels booked to transit the Suez Canal with significant operational, logistical, and cost implications.
Vessels opting for the longer route face higher fuel expenses, extended voyage durations, and additional maintenance requirements.
However, that is a small price to pay when compared to the risks of being targeted by drones or even hijacking ships, as was the case with Galaxy Leader.
Shipping majors across the board have voiced their security fears vowing to avoid the Red Sea until the security situation improves, rendering the Suez routing unavailable for an unknown period.
Higher rates and surcharges
Freight rates are experiencing fluctuations as companies adjust pricing models to account for extended voyage durations and increased operational expenses. Container shipping, bulk carriers, and other maritime sectors are grappling with rate increases, prompting a reevaluation of global shipping strategies.
“Most of the main carriers are invoking Bill of Lading clauses allowing them to pass on extra costs related to the sudden need to deviate vessels for cargo already loaded on board. Shippers will in most cases have no real choice but to accept those added charges,” Lars Jensen, an expert in the container shipping industry, said.
“For cargo not yet booked there has been a slew of new inventive surcharge names as well as the “usual” ones such as PSS. Some carriers have rekindled surcharges last seen in the pandemic supply chain crunch where you can pay to be in a higher tier, such as Diamond, to get priority.
“None of this is surprising. It is clear that capacity is being reduced, and as a consequence, rates including surcharges will go up. The element which is highly unclear is how much. The announced increases are visible, and not insignificant. As an example Maersk is announcing a PSS of 1000 USD/FFE from Far East to N.Europe and 2000 USD/FFE from Far East to Med. Another example is Hapag-Lloyd with an Operational Recovery Surcharge of 1500 USD/FFE from India/Red Sea/Middle East to Europe,” Jensen added.
Fitch Ratings said that the costs linked to re-routing ships away from the Suez Canal are likely to be more than offset by rising freight rates if disruptions continue for more than a few days.
“Container shipping is likely to see the largest freight rate increases, followed by bulk carriers. Tankers, many of which originate from the Middle East, are already enjoying high rates so rises may be limited,” Fitch said.
About 50 ships a day pass through the Suez Canal, evenly split between container ships, tankers and bulkers. Fitch estimates that 25%-30% of global container shipping volumes pass through the Suez Canal. Most of them serve trade between Europe and Asia (including Indian and Middle Eastern destinations).
“Current levels of idle capacity are already low. However, we do not expect disruptions to last long enough to have a meaningful impact on global shipping’s supply-demand balance in the medium term. Furthermore, not all container ships are being diverted from Suez. We still expect supply of container shipping capacity in 2024 to outstrip demand growth by about 4pp,” Fitch added.
The longer transit times around Cape of Good Hope are reducing effective global container shipping capacity by 10%-15%, impacting supply chain logistics. Container ships may adjust vessel speed and reduce port calls to counteract longer routes, further affecting shipping schedules and capacity availability.
“While the impact of this will be on multiple trades, particularly troublesome is on the Far East to North America East Coast (NAEC) trade, as there has been a shift towards the Suez routing due to the drought in the Panama Canal, making a reversal to the Panama routing impossible,” Alan Murphy, CEO of Sea Intelligence said.
“For the Africa routing, the increase in sailing times will be quite substantial, especially for services to the Mediterranean (MED). Using a standard speed of 17 knots during the deviation, we are looking at a likely increase in transit time of roughly 9 days on Far EastNorth Europe, 14 days to MED, and 5 days to NAEC. For a full roundtrip however, additional vessels will need to be injected into services on these trades to maintain a weekly departure.
“Using the number of services on the impacted trades, the average vessel size on each service, and an additional vessel for every 7-day increase in sailing time, it is possible to calculate how many additional vessels are needed on each trade. What this also allows us to do is to calculate the total additional nominal capacity that is needed to cater for sustained round-Africa services.”
With these assumptions, a switch to round-Africa would require 1.45-1.7 million TEU of vessel capacity, Murphy estimates. This equals between 5.1%-6.0% of the total global container vessel capacity. As explained, part of the current overcapacity problem has been absorbed by slow-steaming, and while this additional capacity can also be absorbed – only just – it would require vessels to sail faster.
Rerouting vessels around the Cape of Good Hope significantly increases travel time compared to traditional routes such as the Suez Canal. Longer journeys mean more time spent at sea, resulting in higher fuel consumption and, consequently, increased greenhouse gas emissions.
The longer distances traveled require additional fuel consumption to sustain vessels throughout extended voyages. This is particularly relevant for large container ships, bulk carriers, and other maritime vessels, as they burn more fuel to cover the extended distances.
What is more, extended transit times may lead to reduced operational efficiency, as vessels spend more time in transit and less time at ports. This operational inefficiency can contribute to higher emissions on a per-shipment basis, as ships are not optimized for fuel-efficient, timely operations.
Finally, increasing the speed of vessels results in higher fuel consumption and emissions.
Given these issues, ship owners are also confronted with the challenge of meeting the International Maritime Organization’s (IMO) Carbon Intensity Indicator (CII) requirements, effective from January 1st, 2024. The CII system, designed to assess carbon emissions and impose corresponding financial measures, compels many vessels to operate at reduced speeds. However, the longer routes required to circumvent Africa may prompt ships to elevate their speeds to offset delays, potentially violating emission targets.
Adding to the complexity, an IMO mandate from 2020 mandates the use of very-low-sulfur fuels (VLSFO) or the installation of emission scrubbers on ships. This regulation restricts fuel choices for vessels without scrubbers, complicating refueling options in overwhelmed ports.
In terms of fuel stocks, major South African ports like Durban are reportedly equipped with adequate fuel stocks, including high sulfur fuel oil (HSFO), very low sulfur fuel oil (VLSFO), and marine gas oil (MGO), as reported by Reuters.
However, concerns linger about the high costs, as fuel prices in South Africa surpass those in major bunkering ports like Singapore and Rotterdam due to heavy reliance on imported fuels and limited local production. Additionally, Cape Town faces limitations in HSFO stocks, impacting its global bunker price indexes.
Cape of Good Hope ports
Shipping companies are increasingly considering the Cape of Good Hope route as a viable pathway to mitigate geopolitical risks while accommodating to the new reality of extended transit times.
The Cape of Good Hope, situated at the southern tip of Africa, hosts key ports vital for global shipping. Cape Town, positioned on the southwestern coast, stands as a major international port, while Durban on the eastern coast serves as the busiest port in South Africa. Port Elizabeth and East London, situated on the southeastern coast, contribute to the country’s maritime activities, handling various exports.
With increased activity, ports around Cape of Good Hope, notorious for poor facilities and red tape, are facing congestion as hundreds of large vessels set sights on the southern tip of Africa for refueling and restocking.
On the other hand, some companies, such as Maersk, aim to bunker at the place of destination or origin in order to avoid congestion.
The increased activity sheds light on the need for investment in infrastructure development to accommodate the surge in maritime traffic. Investments in port facilities, navigation systems, and logistical support are becoming imperative to streamline operations and enhance the efficiency of the Cape of Good Hope route.
The implications of these attacks are not only reshaping global shipping routes but are also presenting complex challenges for a new United States-led coalition Operation Prosperity Guardian, seeking to address the growing threat.
Namely, the U.S. has launched a new multinational security operation under the umbrella of the Combined Maritime Forces and the leadership of Task Force 153, which focuses on security in the Red Sea.
“To date more than 20 nations have signed on to participate,” Air Force Maj. Gen. Pat Ryder said, which means that they would contribute military assets such as ships and aircraft.
Some of the countries that confirmed their participation in the coalition include Greece, a major shipping nation, which announced plans to send a warship to join the task force. The member countries also include the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain.
However, most recent media reports indicate that Spain has vetoed European participation in the U.S.-led operation in the Red Sea.
This is contrary to the announcement from Joseph Borell Fontelles, High Representative of the EU for Foreign Affairs and Security Policy/Vice-President of the EU Commission, who said on Wednesday, that the EU member stated would contribute to the operation through EUNAVFOR ATALANTA.
Despite the announcement, the Houthis have pledged to persist in their attacks on vessels journeying to or from Israel throughout the duration of the Gaza conflict. They assert that their operations will persist even in the event of global mobilization by the United States.
That being said, both sides seem to have maintained some restraint so far as fears over spillage of the conflict across the Middle East brew.
The attacks on commercial shipping in the Red Sea are seen as a strategic move by the Houthis to pressure the international community to ramp up talks on a permanent ceasefire in Gaza.
Israel’s bombing of Gaza in the October 7 aftermath has taken the toll of over 20,000 Palestinian lives, with over 5,000 being children.
Talks at the U.N. are continuing on a new draft resolution aimed at accelerating the delivery of humanitarian aid to Gaza which is facing a hunger crisis.
The vote on a potential ceasefire has been delayed again as talks on hostage release in Cairo failed to bear fruit. Meanwhile, Israel has broadened its ground offensive resulting in additional civilian casualties.