On Sunday, 19 January 2024, a ceasefire between Israel and Hamas came into effect in Gaza, offering hope for a return to normalcy, including the resumption of commercial navigation in the Red Sea. However, just hours after this development, uncertainties and doubts remain.
The primary concern revolves around the stance of the Houthis. Their spokesperson announced a suspension of attacks on transiting ships (including those originating from or destined for Israeli ports), with one exception: vessels entirely owned by Israeli companies or flying the Israeli flag will remain targets until all phases of the truce are fully implemented. Additionally, the Houthis warned they would resume hostilities against U.S. or British cargo ships if attacked by the naval forces of these two nations.
As a result, the region remains volatile, even though the Houthis’ military capabilities have been significantly diminished by ground assaults from U.S., British, and Israeli forces. It’s worth noting that the Yemeni group still holds the car carrier Galaxy Leader and its crew, seized over a year ago.
Even if container traffic in the Red Sea—and consequently through the Suez Canal—were to resume immediately, there would still be challenges. In a statement dated 20 January 2025, Norwegian logistics analysis firm Xeneta outlined potential obstacles. It anticipates a gradual transition, starting with the deployment of low-capacity ships, under 10,000 TEU, to assess the safety of the route. If successful, larger container ships, up to 24,000 TEU, could follow.
This gradual approach is crucial to prevent port congestion and disruptions to global supply chains. Xeneta cites recent events: the conflict escalation in December 2023 triggered a chain reaction that became more pronounced six months later, with transport costs on key routes—such as between the Far East and Northern Europe—rising by 426%.
On the pricing front, reopening the Red Sea could have profound implications. Xeneta predicts that shorter average transport distances would bring global demand back to pre-crisis levels, resulting in an 11% decline compared to 2024, despite a projected 3% increase in total volumes for 2025. This demand drop, combined with a record number of new vessel deliveries, would create overcapacity in the market. Consequently, spot freight rates could plummet, forcing carriers to ramp up ship scrapping to mitigate the surplus. Despite advances in capacity management, operators are unlikely to avoid a significant price collapse.
The outlook is equally challenging for shippers. While a potential rate collapse presents opportunities, it also raises risks for managing long-term freight contracts. Currently, average costs for the Shanghai-New York route remain high, at $6,590 per FEU for spot rates and $3,765 for long-term contractual rates. Locking in a contract at these levels could prove economically disadvantageous if the market collapses due to the Red Sea's reopening. At the same time, uncertainty persists, making it difficult to decide when and how to negotiate new agreements.
In this context, Xeneta concludes that adopting contracts indexed to market benchmarks is an increasingly compelling solution. This strategy allows shippers to adapt to market fluctuations without being overly exposed to the risks of locking in non-competitive rates. Additionally, it avoids lengthy negotiations with carriers, who may be unwilling to revise contracts in the event of a sudden reopening of trade routes.
