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Short-lived relief for shippers as shipping costs surge amid Red Sea crisis

Exporters and importers’ reprieve from sky-high shipping costs due to limited capacity during the Covid-19 pandemic — which saw container freight rates surge by seven times or more in 2021 and early 2022 — proved to be a brief one as shipping disruptions in the Red Sea, together with an unexpected spike in demand, have led to a renewed surge in freight rates.

Container freight rates, which slumped to their lowest in October 2023, with the going rate for a 40ft container reported to be about US$1,342, have gradually increased again as attacks by Yemen-based Houthis on ships in the Red Sea forced vessels to take longer detours to avoid the region. This led to a reduction in capacity between Asia and Europe and congestion at key Asian ports.

Drewry’s World Container Index, which indicates container freight spot rates for eight major global trade routes, shows a 181% year-on-year (y-o-y) jump to US$4,716 per 40ft equivalent unit (FEU) on June 6.

While the composite index has risen 77% year to date, it is still below pandemic levels, say shipping experts.

Tasco Bhd (KL:TASCO) deputy group CEO Tan Kim Yong says it is unlikely container freight rates will return to levels seen during the pandemic, which were “exceptional” years for ocean shipping. Still, he is expecting container freight rates to remain elevated at least until the end of this year.

“While global shipping companies and port operators will benefit from increased freight rates, there is often a lag effect for freight forwarders like Tasco,” he says, adding that the jury is still out on whether volume growth will remain at current levels.

Tasco made a record-breaking net profit of RM90.82 million on revenue of RM1.61 billion for the financial year ended March 31, 2023 (FY2023) from the supply chain disruptions brought on by the pandemic. The integrated logistics solutions provider delivered a weaker bottom line in FY2024 as freight rates normalised in 2023, posting a net profit of RM61.74 million, down 32% y-o-y, on revenue of RM1.07 billion.

Tan expects a better financial performance in FY2025 as Tasco sees increased contributions from its warehousing segment. Last Thursday, the group opened a new 600,000 sq ft four-storey warehouse in Shah Alam, Selangor, bringing its total warehousing space in the same location to one million sq ft.

Westports Holdings Bhd (KL:WPRTS) CEO Eddie Lee Mun Tat says freight rates have increased but not to the levels seen during the Covid-19 shipping crisis.

Still, shipping lines can heave a sigh of relief as many had warned of big financial losses in 2024 due to overcapacity and the normalisation of freight rates. Trouble in the Red Sea swung things to their favour, according to Lee.

“The rerouting of ships around Africa’s Cape of Good Hope equates to a roughly 30% increase in transit times. This implies an approximately 9% reduction in effective global container shipping capacity,” said Nora Szentivanyi, senior economist at JP Morgan, in a Feb 8 report.
“Container shipping costs along routes that typically go through the Suez Canal — particularly from Asia to Europe — have surged nearly fivefold. Costs from China to the US have also more than doubled,” she noted.

Szentivanyi is of the view that Suez Canal diversions will inflate container shipping costs for as long as the situation lasts.

The longer the duration of these disruptions, the more likely shipping rates will stay elevated — if not increase further. The one potential silver lining is that there remains an excess supply of container ships globally, and many that were ordered during the pandemic continue to enter service. Thus, it appears likely that once the disruptions are over, shipping rates could lower fairly quickly,” she added.

Knock-on effects from shipping crisis hit ports
As most of the world’s major container shipping lines make detours around the conflict-affected Red Sea, major Asian ports, in particular Singapore, are now experiencing knock-on effects from the crisis.

Congestion at the Port of Singapore is reportedly leading to berthing delays for ships that last as long as seven days. The congestion has also led to the authorities temporarily reopening shuttered berths and yards at Keppel Terminal to ease the backlog of ships queuing to dock in the world’s second busiest port, according to local reports.

S&P Global Market Intelligence expects the Red Sea disruptions to continue at least until Israel achieves its objectives in Gaza.

“The logistics disruptions that started in late 2023 and early 2024, most notably the Red Sea-related shipment issues, took place in the off-peak season. Their true impact will only become clear during the peak season with additional uncertainties including the underlying level of demand for consumer goods, shippers’ desire to move volumes early to mitigate risk and exogenous factors including poor weather conditions and the risk of strikes,” S&P Global wrote in a June 3 report.

The Red Sea shipping crisis has not dampened container volume growth at Malaysia’s largest container terminal operator so far. According to Westports’ Lee, the group is still on track to meet its anticipated single-digit growth in container volumes for 2024. Last year, Westports handled a record container volume of 10.88 million 20ft equivalent units (TEUs).

Westports saw a 5% increase in container volumes handled to 2.67 million TEUs in the first quarter of this year, from 2.55 million TEUs in the previous corresponding quarter.

Lee says the line of ships waiting to berth at Westports remains “manageable”. “Depending on the day or week, the delay is about one day. Some weeks, there are fewer vessels calling at the port. Other weeks, we see the ‘bunching’ of vessel arrivals,” he tells The Edge.

Westports has also been affected by another round of disruptions, but the impact is not as severe as during the pandemic. Learning from the lessons of Covid-19, we are managing our yard — even though the density is high compared with normal days — in that we don’t simply accept ad hoc port calls from vessels trying to drop their boxes here but don’t know when they will pick them up, which will cause congestion at the yard. In the last couple of months, we have been mindful about making sure that we manage our yard well.

“Of course, we hope there is no port congestion. This means the turnaround of the vessels will be faster and thus, optimising the capacity,handling more volume and generating higher revenue in terms of terminal handling charges. But you will have less revenue on storage as containers are cleared within the free days [when no charge is imposed].”

Lee says there are a number of reasons for the severe congestion in Singapore. One is the diversion of container ships via the Cape of Good Hope, which is causing disruption to vessel arrivals at Chinese and Southeast Asian ports.

“Second is hub ports like Singapore are built around smaller feeder container operators, whose short-haul service is unaffected by the Red Sea crisis. They continue to send their containers to the ports where, when there is no disruption, these boxes are picked up by the mother vessels to be shipped from Asia to Europe, or vice versa. But now, because of the crisis in the Middle East, the mother vessels’ schedule is disrupted — they can’t come on time to pick up these boxes. So, the yard in Singapore gets congested and to a certain extent, Westports too,” he explains.

Chinese shippers are also pushing cargo for earlier departures to avoid increasing freight costs as a result of higher tariffs on Chinese-made goods — including electric vehicles and their batteries, computer chips and medical products — by the US starting Aug 1. This has resulted in a shortage of slots on container vessels when they arrive at Southeast Asian ports such as Singapore and Port Klang. The current imbalance between supply and demand has also caused a surge in freight rates.

“So, when the vessels come to hub ports, the slots, which used to be allocated for the hub ports, are now being taken up by Chinese exporters,” says Lee.

Industry observers say shipping delays in Singapore’s port are also due to manpower shortage.

While Lee is uncertain when congestion at the ports will be back to normal, he says customers are expecting the problem to taper off when European companies and schools close for the summer holidays from July, leading to slower demand.

Port Klang Authority general manager Captain K Subramaniam says congestion at Malaysia’s leading container gateway Port Klang is still “not too bad”, with the average berthing delay at between 24 hours and 48 hours.

“One of the biggest routes they are having problems with is Europe. It takes up to 30 days to ship cargo from Europe to Asia [around Africa] and the first port of call in Asia is Port Klang, Port of Tanjung Pelepas (PTP) or Singapore. The shipping lines will as soon as possible try to discharge their cargo at one of these ports. Based on that, there are a lot of requests [from shipping lines]. What we are doing is we are managing them. We have told them to give us early advice so that we can plan the berthing properly. Most of the shipping lines have obliged. We also want to make sure that we don’t upset our regular customers that are on the normal vessel schedule,” he adds.

Subramaniam notes that demand for Singapore port is higher because it has greater connectivity and vessel calls as opposed to Port Klang, which has four calls a month from Europe. He expects demand to slow down from August when US’ tariff hikes on Chinese goods take effect.

“However, the Red Sea shipping crisis will continue as long as the Israel-Gaza conflict lasts. Another concern is that shipping lines sailing around the Cape of Good Hope will potentially face the southern hemisphere winter, when the seas are going to be rough. A lot of container ships are going to be further delayed,” he says.

Dry bulk and air cargo rates are up, but not as fast as containers
Concurrently, the dry bulk market has seen a pickup in demand and freight rates. However, the dry bulk freight rates did not spike at the same degree as rates for container shipping, says Dennis Ling Li Kuang, group managing director of Hubline Bhd.

The Baltic Exchange Dry Index (BDI), the bellwether for global dry bulk shipping, was up 83% y-o-y to 1,869 points on June 6. However, the index, which factors in rates for capesize, panamax and supramax vessels, is down 23% from its year-to-date peak of 2,419 points on March 18.

“We have seen a gradual pickup in dry bulk volumes. Space is getting more limited now. In the last two years, only limited [vessel] capacities were added in Southeast Asia. On Hubline’s part, we added two sets of tugs and barges. Dry bulk freight rates are also picking up gradually, but not as strong as container freight rates,” says Ling.

“In our region, we have just got out of Hari Raya and things are moving very nicely. Overall, it is positive for shipping companies as freight rates are moving up after a slight decline in 2022.”

He expects the group’s shipping division to perform better than its aviation division for the financial year ending Sept 30, 2024 (FY2024), driven by strong demand for its 21 sets of tugs and barges. “Our vessels are full until July. We have also seen our freight rates rise by 5% to 7% y-o-y.”

According to Ling, dry bulk freight rates are expected to remain elevated until at least the third quarter of this year. “The Red Sea crisis is unlikely to be resolved quickly and the peak season is coming up again. I see freight rates continuing to be fairly strong. It will take a while for them to normalise again,” he says.

“In 2QFY2024, the aviation segment improved, contributing RM19.35 million in revenue from RM6.41 million a year earlier. While the number of students at our flying academy has picked up, it is not significant enough … not as strong as before the pandemic, when we had a waiting list.”

Ling expects Hubline to end FY2024 on a positive note. It posted a net loss of RM124,000 for the six months ended March 31, 2024 (1HFY2024), compared with a net profit of RM3.65 million a year earlier, as the group undertook more routine repairs and docking during the period, resulting in fewer voyages made.

As for air cargo rates, Association of Asia Pacific Airlines director general Subhas Menon says they have risen by “low double digits”, partly due to the closure of the Red Sea route to the Mediterranean.

“The closure has led to some shippers switching their shipping options from ocean freight to air freight, but that does not mean that air cargo yields have gone up, which is a function of the distance that you go. The longer you go, the less yield. The growth in demand in Asia-Pacific is mainly for inter-regional air space,” he adds.

In April, Asia-Pacific airlines posted a 15% y-o-y increase in air cargo traffic volumes, with the pickup in global demand supporting export activity from major manufacturing hubs in the region, particularly China.”

Westports’ Lee observes that with Malaysia emerging as a top manufacturing hub beyond China among semiconductor companies to bypass trade restrictions amid the ongoing US-China trade tensions, air cargo operators will benefit from this relocation.

“There are many companies looking to set up their manufacturing hub or regional distribution centre here, which will give us an opportunity. We already have the ecosystem, so the execution and implementation of the policies by the government is very important,” he points out.

National load centre policy no longer necessary for Port Klang, says port regulator

The removal of the national load centre policy will not impact Port Klang, which comprises Westports and Northport, as it has grown to become the world’s 12th-busiest port today, say shipping experts. It is also the country’s busiest container port.

Last year, Port Klang recorded the highest container handling volume in its history of 14.06 million TEUs (20-foot equivalent units), a 6.4% increase from 13.22 million TEUs in 2022. Westports Holdings Bhd (KL:WPRTS), which recently secured a 58-year extension to its concession agreement with the government until 2082, said it would invest RM39.6 billion to nearly double its port capacity from 14 million TEUs to 27 million TEUs by 2053.

In March, Minister of Transport Anthony Loke announced that the government would drop the national load centre policy introduced in the 1990s.

According to Port Klang Authority general manager Captain K Subramaniam, it was necessary at the time as the government was concerned about the continued flow of Malaysian cargo via Singapore and wanted shippers in Malaysia to use local ports, especially Port Klang, which it declared as the national load centre in 1993.

“It was a label that we carried for many years. When Port Klang started in the 1990s, we were not doing well. Most of our cargo was ‘leaking’ to Singapore Port. Our shippers had, at the time, preferred to ship their goods via Singapore but there was a reason for this — because we were not efficient. We did not have enough international shipping lines and services coming to Port Klang then.

“So in the early 1990s, the government came up with a policy (to urge local shippers) to use our own ports,” he tells The Edge.

The policy was aimed at centralising all Malaysian import and export boxes in Port Klang so that the port could invest and grow, with top-class facilities to attract international shipping lines and at the same time capture some Malaysian cargo back from Singapore.

“The main shipping lines are always looking at critical mass. They won’t come just for a few hundred boxes. They want to see huge volumes. The (national load centre) policy was actually to encourage Port Klang to grow and at the same time attract cargo. Now it has been almost 20 years. This policy was misconstrued [by certain quarters as an attempt] to force cargo from Sabah and Sarawak to move through Port Klang. That was not the intention. Ships are free to go anywhere they want.

“But international shipping lines chose to come to Port Klang because there was no critical mass in the ports of Sabah and Sarawak. So they dropped off their cargo in Port Klang and feeder ships would then transport the cargo to other ports in the country. That’s why the minister said ‘let’s do away with the national load centre policy’ because it was sending the wrong signals and vibes,” Subramaniam explains.

Westports CEO Eddie Lee Mun Tat does not expect the removal of the policy to have any impact on the container terminal.

“Many years ago, Port Klang, being close to the Klang Valley, was made the national load centre. Every port can say they are the national port, but it is just a name. At the end of the day, the most important thing is where the cargo is coming from, the connectivity, the frequency, coverage, what vessels are calling at the port, how fast you can turn around the vessels and how much you can service the shippers. Port Klang is now already a hub,” he says.
Source: The Edge Malaysia

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