The Influence of Red Sea Diversions on Trade and Shipping Dynamics
Over the past year, the diversions in the Red Sea have demonstrated that trade is adaptable, akin to water finding its path. The saying “trade at rest is not making money” drives investment and service expansion among ocean carriers and logistics firms, as controlling container movement theoretically increases profits.
According to Xeneta, the detours around the Cape of Good Hope have led to a 17,2 % year-on-year increase in global TEU-mile demand in 2024. To compensate for longer transit times, the global fleet is projected to grow by 4,5 % in 2025, a rate slower than 2024, but the extra capacity will help mitigate the effects of the extended sailing distances around Africa.
Despite a decline in global consumer demand, the longer shipping routes have established a new baseline for freight rates. Current ocean freight rates remain significantly higher than pre-Red Sea rates, with increases ranging from 241 % for routes from the Far East to the West Coast, 148 % to Europe, and 112 % to the Mediterranean. Additionally, surcharges indicate that ocean shipping costs are unlikely to decrease soon.
Maersk and Hapag-Lloyd recently announced that their Gemini Alliance, set to launch in February, will avoid the Red Sea until it is deemed safe, signaling a normalization of these diversions.
Emily Stausbøll, a Senior Shipping Analyst at Xeneta, noted that without a political resolution in the Red Sea conflict, major carriers will continue to divert their vessels around Africa in 2025, leading to ongoing disruptions for shippers. This situation could cause spot rates to spike again if shipping capacity remains tied up with these diversions. While a significant return to the Red Sea is unlikely, some China-affiliated carriers might begin operating through the region in 2025 if risks are low enough, potentially creating a complex market dynamic for shippers.
The Red Sea diversions are also affecting logistical services and creating opportunities for alternative port destinations and near-shoring countries. Paul Brashier, vice president of global supply chain for ITS Logistics, stated that U.S. shippers are increasingly routing goods from Asia through West Coast ports and using rail to transport them to the East Coast, reverting to pre-COVID operations.
Brashier expressed concern over the heavy reliance on rail infrastructure to handle this increased volume, emphasizing that 2025 will be a critical year for assessing the system’s capacity.
Alan Baer, CEO of OL USA, highlighted that American importers and exporters have adapted their supply chains to account for the longer transit times due to the detour around Africa. This shift has prompted organizations to explore new supply sources, including near-shoring in Central and South America.
As the industry navigates the second year of Red Sea diversions, companies will compete to maximize container handling. In uncertain times, the ability to pivot and innovate is paramount.
