2. Impact of Red Sea conflict on TEU-mile demand

Summary:

  • No return of ships to Red Sea would see continued pressure on capacity, but eased by new deliveries
  • Large-scale return to Red Sea would see TEU-mile demand reduce by 11% in 2025
  • Partial return to Red Sea would see TEU-mile change of between +3% and -11%
  • Large scale return is least likely scenario
  • Market would see intriguing dynamic if some Chinese carriers return while European carriers continue to divert around Africa

Xeneta data includes capacity and transit times so you can stay up to date as carriers adjust to the developing situation.

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The situation in the Red Sea means purely focusing on the number of containers moved does not reveal the full picture for container shipping.

Instead, we must consider TEU-mile demand, which factors the distance each container is transported as well as the number transported.

TEU-mile demand shot up in 2024 as ships diverted around the Cape of Good Hope and was the reason many ships that would otherwise have contributed to overcapacity in the market in 2024 had work to do.

In 2025, TEU-mile demand will continue to be a key factor in understanding the dynamics behind shifting freight rates.

For our 2025 Outlook, we explore three potential scenarios:

  1. No return of container ships to the Red Sea
  2. Full return of container ships to the Red Sea
  3. Partial return of container ships to the Red Sea

Scenario 1: No return of container ships to the Red Sea

Freight rates continue to ease as growing fleet absorbs diversions.

Reasons for this scenario to play out

  • Conflict in the wider Middle East, which formed the backdrop for Houthi attacks of ships in the Red Sea, is escalating and showing no signs of a resolution.
  • Carriers will be mindful of the risk attacks pose to their crew and ships, with multiple fatalities since the crisis began.

Impact for shipping

  • Average distance sailed will remain broadly the same as in 2024, which means growth in TEU-mile demand will closely follow growth measured in volumes.
  • Capacity tightness will ease as new ships are delivered.
  • Longer transit times now built into supply chains.
  • Freight rates continue to ease as growing fleet absorbs diversions.

Scenario 2: Full Return

Major carriers return to the Red Sea in a short period of time if threat is deemed to have passed.

Reasons for this scenario to play out

In announcing their 2025 services, several carriers published two versions - one where ships continue to sail around the Cape of Good Hope and the other going through the Red Sea. Despite this, there is little else to suggest a full return is likely in 2025.

Impact for shipping

  • Average sailing distance drops to pre-crisis levels which leads to a drop in TEU-mile demand. Even with 3% growth in global volumes, TEU-mile demand would be down 11% from 2024.
  • Congestion at major ports in the immediate period following a return to Red Sea.
  • Shippers adjust to a return of shorter transit times.
  • Capacity previously absorbed by the diversions is freed up which floods the market.
  • Freight rates drop unless carriers are very effective at managing capacity, but this would be difficult.
  • Charter rates drop and demolition increases.

Scenario 3: Partial return

Select carriers choose to return if they deem the risk low enough. One carrier returning to the Red Sea does not mean other carriers will follow if they deem their risk profile to be higher.

Reasons for this scenario to play out

China-affiliated ships are at the lower end of the risk scale. Therefore, even if the Chinese carrier COSCO makes a full return in 2025, European carriers will not necessarily follow.

Impact for shipping

  • Assuming global volume growth of 3% in 2025 this would lead to a year-on-year change in TEU-mile demand of between +3% and -11%.
  • Easing of pressure on capacity, with wider impact on charter market and demolition activity.
  • Freight rates to ease unless carriers can successfully manage capacity.
  • New alliances adapt as individual carriers make individual calls on their fleet.

“A large-scale return to the Red Sea seems inconceivable at present, but a partial return may be possible at some point in 2025. This will throw up an intriguing market dynamic with shippers facing the choice of utilizing trades with shorter transit times via the Suez Canal or sticking with carriers who continue to divert around the Cape of Good Hope. There will much to consider, not least for the carriers who may begin to lose market share to competitors who have returned to the Red Sea.”

Emily Stausbøll

Senior Shipping Analyst, Xeneta