This article appeared first in The Edge Malaysia Weekly from June 10, 2024 to June 16, 2024

Exporters and importers were spared from high shipping costs during the Covid-19 pandemic, which saw container rates increase by seven times or even more in 2021 and 2022. However, the respite was only temporary, as shipping disruptions on the Red Sea and an unexpected surge in demand have led to another surge in freight prices.

Container freight rates have increased gradually again after the attacks by Yemeni Houthis against ships in the Red Sea forced them to take longer detours in order to avoid the area. This resulted in a reduction of capacity between Asia & Europe, and congestion at key Asian port.

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

Shipping experts say that while the composite index is up 77% this year, it’s still below pandemic levels.

Tan Kim Yong, deputy group CEO of Tasco Bhd (KL : TASCO), says that it is unlikely that container freight rates will ever return to the levels seen during pandemic years. These were “exceptional” ocean shipping years. He expects container freight rates to remain high at least until the year’s end.

“While global shipping and port operators will benefit, there is often an lag effect for forwarders like Tasco,” says he, adding that it is still unclear whether the volume growth will continue at current levels.

Tasco achieved a record-breaking RM90.82m net profit on revenue of RM1.61bn for the financial period ended March 31, 2023. This was due to supply chain disruptions caused by the pandemic. The integrated logistics solutions provider’s bottom line was weaker in FY2024, as freight rates had normalised by 2023. It posted a net loss of RM61.74million, down 32% yo-y on revenue of RM1.07billion.

Tan expects better financial performance for FY2025, as Tasco’s warehousing division contributes more. Last Thursday, the group launched a new warehouse of 600,000 sq. ft. spread over four floors in Shah Alam in Selangor. This brings the total amount of warehousing in the same location up to one million square feet.

Eddie Lee Mun Tat, CEO of Westports Holdings Bhd KL:WPRTS, says that freight rates have increased in recent years but not at the same level as during the Covid-19 Shipping Crisis.

Shipping lines can still breathe a sigh relief, as many had warned that they would suffer huge financial losses by 2024 due overcapacity and normalisation of freight prices. Lee says that the Red Sea crisis swung the tide in their favor.

Rerouting ships around Africa’s Cape of Good Hope results in a 30% increase in transit time. In a report published on February 8, Nora Szentivanyi said that this would result in a 9% decrease in the global container shipping capacity.

Container shipping costs on routes that usually go through the Suez Canal, especially from Asia to Europe, have increased by nearly fivefold. She noted that costs from China to the US had also increased by more than twofold.

Szentivanyi believes that the Suez Canal diverts will increase container shipping costs as long as this situation continues.

“The longer these disruptions last, the more likely it is that shipping rates will remain high — if they don’t increase further. One silver lining could be that there is still an excess of container ships in the world, and many were ordered during pandemic. It is likely that shipping rates will drop quickly once the disruptions have ended,” she said.

Major Asian ports, notably Singapore, are experiencing the effects of the crisis as major container shipping lines detour around the conflict-affected Red Sea.

According to local reports, congestion at the Port of Singapore has caused berthing delays of up to seven days for ships. According to local reports, the congestion has led to the authorities temporarily opening shuttered berths at Keppel Terminal in order to reduce the backlog of vessels queuing up to dock in the second busiest harbour on the planet.

S&P Global Market Intelligence believes that the Red Sea disruptions will continue at least until Israel achieves their objectives in Gaza.

“The logistics disruptions, notably the Red Sea-related shipping issues, started in late 2023 or early 2024 took place during the off-peak period. The true impact of these disruptions will only be apparent during peak season, with additional uncertainties such as the underlying level in demand for consumer products, shippers’ desire move volumes early to reduce risk and exogenous variables including poor weather and strike risks.

Malaysia’s largest container terminal operator has not yet been affected by the Red Sea shipping crisis. Lee from Westports says that the group is on track to achieve its single-digit container volume growth for 2024. Westports handled container volumes of 10,88 million 20ft-equivalent units (TEUs) in 2018.

Westports reported a 5% rise in container volumes handled in the first quarter this year to 2,67 million TEUs, up from 2,55 million TEUs the previous quarter.

Lee says that the number of ships waiting at Westports to dock is “manageable”. The delay can vary from one day to a week depending on the day. Some weeks there are fewer ships calling at the port. Some weeks, we can see a ‘bunching of arrivals’.

“Westports was also affected by another round disruptions, but it wasn’t as severe as the pandemic. We have learned from Covid-19 and are managing our yard in a way that prevents congestion. We have been very careful to manage our yard properly in the last few months.

“Ofcourse, we hope that there is no congestion in the port. This will result in a faster turnaround of the vessel, allowing it to handle more volume, and generate higher revenue from terminal handling charges. You will make less money on storage because the containers are cleared during the free days.

Lee says that there are several reasons for the severe traffic congestion in Singapore. One of the reasons for the severe congestion in Singapore is the diversion of containers via the Cape of Good Hope. This is causing delays to vessel arrivals in Chinese and Southeast Asian port.

“Second, hub ports like Singapore were built around smaller feeder operators whose short-haul services are not affected by the Red Sea Crisis. They continue to send containers to ports where, if there is no disruption, the mother vessels pick up these boxes to be shipped from Asia into Europe, or vice-versa. Now, due to the Middle East crisis, the mother vessel’s schedule is disrupted – they can’t arrive on time to collect these boxes. The yard in Singapore and, to a certain degree, Westports, become congested because of this.

Chinese shippers are also pushing for cargo to be shipped earlier in order to avoid increased freight costs due to the higher tariffs imposed by the US on Chinese-made products, including electric vehicles and batteries, computer chip and medical products. This has led to a shortage of container vessel slots when they arrive in Southeast Asian ports like Singapore and Port Klang. The current imbalance between demand and supply has also led to a rise in freight rates.

Lee says that Chinese exporters are now taking up the slots which were previously allocated to hub ports when vessels arrive.

Observers in the industry say that shipping delays at Singapore’s port is also due to a shortage of manpower.

Lee is unsure when congestion will return to normal at the ports, but he says that customers expect the problem to ease when European companies and school close for summer holidays in July, resulting in a slower demand.

Captain K Subramaniam, general manager of the Port Klang Authority, says that congestion at Malaysia’s largest container gateway Port Klang remains “not too bad”, and that berthing delays are typically between 24 hours to 48 hours.

“One of their biggest problems is Europe.” The first port in Asia to call is Port Klang or Port of Tanjung Pelepas. Shipping lines will try to discharge their cargo as soon as they can at one of these port. There are many requests [from shipping companies] based on this. We manage them. We asked them to give us advice early so that we could plan the berthing correctly. The majority of shipping lines have complied. We also don’t want to upset our regular customers who are on the normal schedule of vessels,” he says.

Subramaniam points out that the demand for Singapore’s port is higher due to its greater connectivity and vessel call as opposed Port Klang which only has four calls per month from Europe. He expects the demand to drop after August, when US tariff increases on Chinese goods go into effect.

“However, I believe that the Red Sea Shipping Crisis will continue for as long as there is an Israel-Gaza conflict. Another concern is the fact that shipping lines traveling around the Cape of Good Hope could be facing the rough seas of the southern hemisphere’s winter. He says that container ships will be further delayed.

The dry bulk market is also experiencing an increase in demand and freight costs. Dennis Ling Li Kuang (KL:HUBLINE), group managing director at Hubline Bhd, said that dry bulk freight rates have not risen to the same extent as container shipping rates.

The Baltic Exchange Dry Index, the bellwether of global dry bulk shipping was up 83% yo-y on June 6 to 1,869 pts. The index, which includes rates for capesize vessels, panamax vessels and supramax ships, is down by 23% since its peak of 2,419 on March 18.

“We have seen an increase in dry bulk volume. The space is becoming more limited. In Southeast Asia, only limited [vessel] capacity was added in the last two decades. Hubline has added two tugs and barges. Dry bulk rates are also increasing, but not at the same pace as container rates,” says Ling.

“In our area, we just got through Hari Raya. Things are moving very well.” Overall, the freight rates are increasing after a slight drop in 2022. This is good news for shipping companies.

He expects that the group’s shipping division will perform better than its Aviation division for the financial period ending Sept 30, 2024, due to the strong demand for 21 sets of tugs & barges. “Our vessels are fully booked until July. Our freight rates have also increased by 5% to 7 % y-o y.”

Ling believes that dry bulk rates will remain high until at least the third-quarter of this year. “The Red Sea Crisis is unlikely to be resolved soon and the peak season will be back.” I think freight rates will continue to be strong. It will be a while before they normalise,” he says.

“In 2QFY2024 the aviation segment improved and contributed RM19.35million in revenue, up from RM6.41million a year ago. The number of students at the flying academy has increased, but it’s not enough. It’s not as high as before the pandemic when we had a wait list.

Ling expects that Hubline will end FY2024 in a positive manner. It posted a loss of RM124,000 in the six-month period ended March 31, 2024 (1HFY2024) compared to a profit of RM3.65million a year ago. This was due to the group undertaking more routine repairs and docking, resulting in fewer trips made.

Subhas Menon, director general of Association of Asia Pacific Airlines, says that air cargo rates have increased by “low double-digits”, in part due to the closure of Red Sea route from the Mediterranean to the Mediterranean.

“The closure led some shippers to switch their shipping options from ocean to air freight. But that doesn’t mean that air cargo yields are higher, as they are a function the distance you travel. The longer you travel, the lower the yield. He adds that the growth in Asia-Pacific demand is primarily for inter-regional space.

“In April, Asia-Pacific Airlines posted a 15% increase y-o-y in air cargo volumes. The pickup in global demand supported export activity from major production hubs in the area, especially China.”

Westports’ Lee explains that air cargo operators are likely to benefit from this move, as Malaysia is emerging as the top manufacturing hub outside of China for semiconductor companies looking to bypass trade restrictions in the midst of ongoing US-China tensions.

“There are many businesses looking to establish their regional distribution centre or manufacturing hub here, which gives us an opportunity. “We already have the ecosystem. The government’s execution and implementation of policies is very important,” he says.

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