Skyrocketing costs in the Red Sea: A hindrance for merchants engaging in cross-border trade

The world's second largest container port, Singapore, has recently seen a significant surge in the number of containers waiting to dock, reaching a peak of 480,600 twenty-foot equivalent units (TEUs) in late May. This surge is just one of the many challenges facing the global shipping industry, which is currently grappling with reduced container traffic through the Suez Canal due to the crisis in the Red Sea.

The Red Sea shipping crisis has had a profound impact on global shipping costs, causing them to skyrocket. The congestion at major Asian ports, such as Singapore, is driving up container shipping prices, according to a S&P Global report. In early June, shipping costs increased by around USD 1,000 for a 40-foot container, with another hike expected in late June.

The strong increase in export demand from China, driven by robust economic growth and geopolitical factors such as intensified Western sanctions on Russian energy exports, has shifted global demand dynamics in China's favour. This growth is mainly driven by the markets of Mexico and Brazil, making Latin America the fastest growing region for Chinese exports in the first half of the year. As a result, shipping prices to Latin America have increased significantly, with shipping prices to the region having increased by 1.5 times as of May 17.

Sea freight is a more mainstream and economical choice for cross-border e-commerce sellers compared to air freight. However, the current shipping crisis has led some companies to purchase their own containers to address the shortage, which could lead to increases in logistics costs and transportation times.

In an effort to alleviate the congestion, French shipping and logistics company CMA CGM added a new M2X route from China to Mexico in late May, deploying eight container ships each with a capacity of over 4,000 TEUs.

The growth in China's international container throughput at ports has maintained steady growth since 2023, growing 10.3% year-on-year in the first four months, accelerating since the fourth quarter of last year. In the first four months of 2024, China's total exports to Latin America increased by 11.4% year-on-year from January to April.

The Shanghai Containerized Freight Index (SCFI) has risen for eight consecutive weeks, increasing over 50% in the past month. The strong demand for sea freight has also driven up air cargo demand in the Asia Pacific, growing by 14.0% year-on-year in April, the strongest growth among all regions.

These increased costs could eventually be passed on to consumers, putting a strain on economies around the world. The shipping industry is currently in a state of flux, and it remains to be seen how it will adapt to these challenges. However, one thing is certain: the global shipping crisis is far from over.

Skyrocketing costs in the Red Sea: A hindrance for merchants engaging in cross-border trade