Container Bytes #44: Red Sea Routing Economics and Chronic Port Gridlock

Welcome to this week's edition of Container Bytes! Judah Levine, Head of Research at Freightos, is hosting solo again this week while Julia continues her vacation.

In this episode, we unpack why ocean carriers—including Maersk, Hapag-Lloyd, CMA CGM, Cosco, and MSC—are taking steps to resume Red Sea transits despite the collapse of the US-Iran memorandum and ongoing Houthi threats. Driven by surging bunker fuel prices, the extended trip around Africa's Cape of Good Hope has grown significantly more expensive. Combined with chronic port congestion that is tying up global fleet capacity, carriers are re-evaluating the economics of shorter Red Sea transits.

We also examine the broader container market where port congestion in North Europe and Asia has shifted from a seasonal issue to a baseline operational constraint. While Asia-Europe rates have cooled about 20% from their July highs to $5,000/FEU, Transpacific West Coast rates surged back to $7,400/FEU, and East Coast prices remain elevated above $9,000/FEU.

Finally, we track upcoming cost factors hitting importers in September: emergency bunker surcharges, Panama Canal draft reductions ahead of projected El Niño droughts, and air cargo rate fluctuations following recent typhoons.

Chapters: 

• 00:00:00 — Solo Session: Judah hosting while Julia remains on vacation. 
• 00:00:10 — Strait of Hormuz Status Quo: MOU expiration resets regional baselines. 
• 00:00:46 — Red Sea Routing Economics: High bunker costs drive carriers back to Suez. 
• 00:02:19 — Chronic Port Congestion: How gridlock became the baseline in Europe and Asia. 
• 00:04:07 — Asia-Europe Rate Cooling: Spot prices drop 20% from July peaks. 
• 00:05:21 — Transpacific Resilience: West Coast rebounds to $7,400 as demand holds. 
• 00:06:16 — Surcharge Wave: BAF increases and Panama Canal restrictions set for September. 
• 00:08:26 — Air Cargo Shifts: Typhoon disruptions and post-de minimis capacity movements.

This podcast is a little experiment from Freightos—and may not be around forever—so if you dig quick bites of freight wisdom, let us know. 

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Transcript

SPEAKER_00 0:00

Hi everyone, I'm Jude Levine, head of research at Frados, and welcome to this week's Container Bites Podcast. It's going to be just me again this week as Julia is still out on vacation. So starting with the straight up removes, there's really not much to report because the uh status is about back to the status quo from before the uh ceasefire agreement between the US and Iran. So a little more than 60 days ago, the sides signed a memorandum of understanding that expired after 60 days, and there's been no steps to renew it. And really the terms of the memorandum weren't kept by either side in any case. So we're back to the status quo, which means uh Iranian attacks on vessels in the strait, U.S. blockade on Iranian traffic, and just very little traffic going through the strait at all. Despite this, however, despite the ongoing war, despite increased tensions and renewed attacks in the Red Sea by the Houthis, MERSC, along with other carriers like Hapegloy, CMACGM, Costco, also MSC, they all seem determined to continue taking steps back toward resuming Red Sea transits. Let's take a step back and remember what's happened in the Red Sea. When attacks uh started back in late 2023, it basically caused a very significant drop in Red Sea traffic by container carriers. When there was an Israel from us ceasefire signed back in October, we started to see some um cautious steps back by CMAC GM and all and also immersed. When the war with Iran broke out in February, basically there were U-turns of those steps back. When the memorandum of understanding was was signed, we started to see steps back towards the Red Sea again. Um but uh when that collapsed and there was some step back, but now in the last uh few weeks we've seen more and more steps towards a return to the Red Sea. So what's the different this time? So Leiner Liduka points out that even with significant additional costs of insurance costs for going through the Babel Mandab for passing through the Southern Red Sea, what's different is really fuel costs, right? Going around the Cape of Good Hope is a much longer diverted uh journey, and it's become much more expensive than it was in late 2023 because the cost of bunker fuel has increased so significantly, and that might change the calculations, be changing the calculations for these carriers. Another new motivating factor may be port congestion. So kind of historically, port congestion was seasonal. It would come when demand was very strong, when volumes were very strong. It would also come from external shocks like labor strikes, like um uh storms, weather, things like that. And the current very high levels of congestion that we're seeing in the Far East and also in Europe can be attributed to external shocks, like the recent three typhoons that hit in the Far East, the drought in the Rhine. But even before these external issues pushed uh uh congestion to very high levels, congestion has just kind of been a chronic condition, especially in North Europe for kind of more than uh a year. And this is causing a lot of problems, and it's due to just kind of growing volumes, increases in demand. And now that demand has kind of outpaced or outstripped the capacity of these ports and is really making congestion almost the baseline. And then any other issue that would add congestion is making it very much worse, and backlogs take a long time to unwind. Mersk in the recent earnings call singled out congestion as kind of a new and major component of container market dynamics in general, of you know, part of what's a factor of supply, let's say. And again, because of this growing uh uh volumes, really headhaul volumes, and that means a lot more empty containers to be processed. So back to the Red Sea, that might mean that vessel capacity now that's being chronically tied up for longer stretches because of congestion, that might be changing the calculations too and incentivizing carriers to consider the shorter Red Sea route and add some speed to this ecosystem that has now slowed down even more because of congestion. So port congestion, which um in North Europe also now includes a labor strike on Monday in some ports in Germany, congestion could be one factor keeping Asia Europe container rates higher maybe than they otherwise would be, as we're just past peak season and demand is starting to ease. So we've had cooling volumes that have brought down freight rates from their July highs. So if we recall, we had if we recall, we had an early start to peak season in late May, early June, big spike in rates up to the uh beginning of July. Early peak season seems to be meaning uh an early end to peak season as well for Asia Europe, where we're seeing uh uh rates continue to cool. So Asia and North Europe prices were at about $5,000 per FEU to North Europe and also to the Mediterranean. That's a $20 and $1,000 per FEU drop since that July high for North Europe, and that's a $2,000 drop for uh Mediterranean since that July high. But rates are still about 60% higher than they were before the start of peak season for Asia and North Europe, and that might be an impact of congestion kind of tying up capacity and not letting rates fall as quickly as otherwise would if uh just based on demand decreases. For the Trans-Pacific, though, demand is uh holding up. Peak season continues, really to the surprise of a lot of us who um have been watching this closely, um, and and rates for uh for for the West Coast climbed 9% last week to about 7,400, um, and they're about back to where they were in their July high. If you recall, we had uh rates really behaving in tandem, or at least West Coast rates behaving in tandem with uh North Europe, climbing very sharply starting in June up to early July, and then starting to decrease in the second half of July. It may be that that decrease of really the anomaly was really a supply side factor because carriers were adding capacity. Maybe they kind of overshot the levels of capacity that were needed, saw rates coming down. Now that that's been right size, we've seen going back up to those peak levels. For the East Coast, rates have just stayed elevated at about uh more than $9,000 uh per container, and that continues to be the case. Container spot rates could face some additional upper pressure from other uh sources in the coming weeks. So one is that uh bunker fuel prices have climbed about 15% since the ceasefire collapse, and some carriers are increasing their emergency fuel surcharges, not by a crazy amount, about $90 per container, and that's starting in mid-September, but just something else that might add to that kind of elevated floor that we've seen. The other is in the Panama Canal. So the Panama Canal Authority is taking steps kind of preemptively because of anticipations of a coming drought, because of anticipations of a coming El Nino, and that could cause drought conditions later for the second half of this year and into 2027. So the authority has reduced daily transits already by two and are going to reduce the maximum draft for neo Panama spessels by uh two feet by uh by early September. So some carriers are already announcing canal transit surcharges, and these are big range. They're ranging from $200 per container up to $1,000 per container. These are going to start in mid-September. So that could impact rates really for Asian and U.S. East Coast volumes. For frame of reference, though, we might recall that the Panama Canal last faced significant drought and low water levels for about a year, starting back in May of 2023. At its lowest, the draft restrictions were set at 44 feet. And as we said, we're going to be at 47 and a half starting in September. And daily transits were reduced to 22. Right now, even with the reduction, we're at 34 from kind of a maximum of 36. So we're not at very significant restrictions just yet, but there is the concern that those might come later on this year and into next. What would that mean for the container market? It would mean higher costs and longer waits for carriers, and that they would pass on those costs that we're already seeing through those kinds of surcharges. Um, but we also saw how because of this shifts in operations, we saw fewer carriers choosing to transit, instead, changing services, transshipping from one coast of Panama to the other. And some in some cases, that's something also we have to keep an eye on. Finally, air cargo uh rates out of the Far East in China increased last week, and that might be a result of the latest typhoon, which disrupted operations at some of the major airports. So the Freitas Air Index call shows that Far East China to North America rates increased 17% week on week last week, up to above $7 per kilo. Rates have started to come down since then. They're about $6.50 so far this week. Um, Far East and China rates to Europe climbed 8% to $4.45 per kilo last week, probably for the for the same reasons. Um in general, though, China and Europe operations are facing lower volumes because of the changes to De Minmas. Lower e-commerce levels of e-commerce volumes are travel by air from China to uh Europe. But carriers are also shifting a lot of capacity away from China Europe lanes for this very reason. And so we haven't really seen a rate collapse in this lane at all. Okay, that's it. Thanks for joining. Hope to see you next week. Bye bye.