South of Africa on the head haul?

Since the end of October 2015, SeaIntel Maritime Analysis showed that 115 vessels deployed on Asia-USEC and Asia-North Europe services have made the back-haul trip to Asia by sailing south of Africa instead of through the Suez and Panama Canals, their routing on the head-haul. Of the 115 voyages, three were vessels on Asia-North Europe, while the rest were deployed on Asia-USEC. We could also see that there were plans to switch more Asia-North Europe sailings to the south of Africa routing in the coming weeks.

While the change of routing of some Asia-North Europe services (back-haul) to south of Africa is a blow to the Suez Canal, it will not become critical until we see more back-haul services being switched and/or the head-haul routing also is changed. In this week’s SeaIntel Sunday Spotlight we analysed the possibility of carriers switching their head-haul routing to south of Africa in order to avoid the Suez Canal fee.

The vessels currently using the route south of Africa on the back-haul have mostly used this option without increasing transit time or dropping intermediate calls, e.g. in the Mediterranean or Middle East, but have simply sped up vessels on the leg that would otherwise have gone through the Suez Canal. CEO and Partner in SeaIntel, Alan Murphy says: “This is not an option on the head haul, as all services currently sail so fast on the canal leg that roughly extra 3,100 nm cannot be incorporated without increasing the transit time between Asia and North Europe, as
most ultra large vessels cannot sail faster than 21-22 knots. We therefore examined the economic viability of the south of Africa routing if 3.5 or 7 days were added to the head haul transit time”.

The extra 3.5 days scenario implies that 3.5 days have also been added to the back haul transit time, making it even more likely that the back haul voyage will also be switched to south of Africa. The 3.5 and 7 days scenarios require that the carriers deploy an extra vessel per service in order to keep weekly intervals. Charter prices vary quite a bit, and no efficient market currently exists for vessels above 10,000 TEU, but brokers with whom we were in contact earlier normally assume that a vessel costs roughly 3.5 USD/nominal TEU per day; this covers the building costs, OPEX and the necessary return on invested capital. Thus a 13,000 TEU vessel roughly costs 45,500 USD per day.

“Carriers considering the longer route will be mindful of the potential loss of business as a result of the longer transit times, but it should be remembered that carriers introduced slow-steaming without major opposition from shippers, who seem to value lower freight rates over shorter transit times. Potentially, we may see carriers offering “business class” fast services through the Suez Canal, and economy fare around the south of Africa”, added Mr Murphy.

The analysis shows that 12 of the 19 dedicated Asia-North Europe services could sail south of Africa on the head-haul if 3.5 days was added to the transit time. The potential savings vary from service to service, ranging from 7.3 to 19.4 million USD on annualised basis, compared to the current routing through the Suez Canal. On top of this, with the extra 3.5 days transit time on the back-haul carriers could save around 5 million USD per service in fuel savings, if the back-haul routing was rerouted to south of Africa, and this is in addition to the backhaul canal fee savings of approximately 20 million USD/year per service. If instead carriers were to route the vessels through the Suez Canal on the back-haul, the extra 3.5 days of sailing time would not add any significant savings on the back-haul fuel consumption, due to the already low sailings speeds.

If seven days were added to the transit time on the head-haul all 19 Asia-North Europe services would be able to make the routing south of Africa. On average the carriers would save around 17.2 million USD per year per service. Combined, the cash-strapped carriers could save 275 million USD per year.

SeaIntel also note that an added benefit would be that both scenarios would soak up 19 ultra-large container vessels, equalling roughly 270,000 TEU. Such a move would be greatly beneficial for the carriers, as it would go a long way towards
restoring the supply/demand balance in the market.