After 427 days of Red Sea diversion, there is genuine possibility that it could be coming to an end.
Phase one of a ceasefire and hostage release agreement between Israel and Hamas came into force on Sunday 19th January 2025.
Going back over a year, the conflict in Gaza was claimed to be the original motivation for the Houthi-rebel group in Yemen targeting commercial vessels. Meaning an end to the fighting in Gaza, in theory, creates the return of viable passage in the Red Sea.
Indeed, the Houthi-rebel group announced on the same day that attacks against US and UK vessels would cease with immediate effect. The Houthi’s would now only target Israeli linked or flagged ships, until such a time phase 2 and 3, a more permanent ceasefire, was agreed. However, the Houthi statement read that any aggression from the UK or USA would result in merchant ships linked to those nations being targeted again.
"There had been suggestions that the Houthi rebels were profiting significantly from some companies covertly paying to ensure safe Red Sea passage. Therefore this announcement that attacks on some vessels would cease came as a bit of a surprise over the weekend."
Liam Launders, Head of Sales, WTA
Therefore, this could be the beginning of the end of the Red Sea diversion. One of the biggest ever events in global shipping. An event which has been extremely disruptive and expensive for shippers.
But there are reasons to be doubtful at this stage. Let's look at what some of those doubts are, and what an ending of the Red Sea diversion will mean for shippers.
Doubts over the return of vessels to the Red Sea
Houthi announcements are unreliable
The Houthi-rebel group have always insisted that they are only targeting ships with links to the USA, UK or Israel. However, their attacks on merchant ships have appeared much more indiscriminate than that. Often, vessels with no apparent links to those nations have been hit.
For example, in March 2024, the Greek-flagged, Chinese-owned and operated Huang Pu vessel was hit several times in a missile attack. A ship with absolutely no apparent links to the nations mentioned, but is just one of several incidents involving ships with no clear links to the USA, UK or Israel.
There has been speculation this is down to the Houthi’s using old data related to the ownership of vessels, or just simply not being transparent.
Consequently, it might take some time without attacks, before the major shipping lines have confidence their vessels are not at risk. Meaning a return to the Red Sea in the coming days or weeks is unlikely. Doing so would mean the major shipping lines taking their direction from what the UK and USA regard as a terrorist organisation.
Lack of motivation from the carriers
Whilst this has been a period of horribly high rates and huge uncertainty for shippers, the same cannot be said for the carriers. They have enjoyed record profits outside the covid-era. Q3 2024 delivered net income 856% higher than Q3 2023.
This has mostly been put down to the Red Sea diversion causing an 18% increase in teu-miles, placing extraordinary capacity constraints on the sector almost overnight. As the financial figures confirm, it’s a situation which has helped the carriers significantly. Before the diversion in late 2023 rates were at loss-making levels.
There has been no significant uptick in global economic growth or demand over the last 400 days. This means it's highly likely that the freight rate market will return to this environment with the end of the Red Sea diversion. If anything, with the prospect of significant tariffs on imports from the new US administration, demand could sink further in 2025.
The carriers obviously know all of this. Therefore, it’s not a huge leap to speculate they might lack the motivation to rush back to the passage of the Red Sea. They know that doing so will almost certainly send rates significantly downwards, hitting their profitability substantially.
A time of changing schedules for the carriers
A further point which makes it unlikely that carriers will return to the Red Sea very soon, is the timing of this development.
It has come at a time of significant schedule change for carriers, with the 2M alliance between MSC and Maersk to disband at the end of January. That will be immediately followed by the formation of the Gemini Cooperation between Maersk and Hapag-Lloyd from the start of February. That leaves the remaining members of THE Alliance, ONE, HMM and Yang Ming, adjusting to life in the new Premier Alliance.
Consequently, as the carriers take time to bed in new networks and new partners, it feels unlikely they will be in a position to change their routing for Asia-Europe trade lanes significantly.
It feels more likely they will bed the new schedules in with the current diversion, then adjust to incorporate the Red Sea later in the year.
What an end to the Red Sea diversion would mean for shippers
Significant downward pressure on rates
As mentioned, it’s widely accepted that ending the Red Sea diversion would bring significant downward pressure on rates. Returning us to the market of late-2023, when shipping lines mostly found themselves in the red.
Only around 100,000 teu of old capacity was scrapped in 2024, according to Alphaliner data. That compares with an annual average of 311,638 teu in the 10 years before the pandemic. It’s true that the carriers extended the life of some vessels last year. We can be confident we would see a surge in vessel deletions to address an overcapacity situation from the carriers in 2025, should a Red Sea return materialise.
However, it seems doubtful it would be able to offset what would be a huge reduction in teu miles.
A significant reduction in transit times on Asia-Europe trade lanes
The Red Sea diversion means a roughly 3000 nautical mile diversion for ships heading from the Far East to European destinations. That came with an approximately 15-day increase in transit time, depending on the destination.
Consequently, reversing this diversion will mean a return to more typical transit times on this trade lane. If that happens, we can expect a return to traditional seasonal patterns on freight rate.
However, it’s plausible that shipping lines could slow their vessels to further address a supply/demand imbalance.
Congestion at European ports
Between 2-3 weeks after the reinstatement of Red Sea transits, we can expect some congestion issues at European ports. This would be due to the final vessels which were required to divert around the Cape of Good Hope, arriving into Europe at the same time as those who were able to take the shortcut.
This surge in arrivals could create a scenario in which vessels are waiting to berth at key European destinations, which would impact schedule reliability in the short term.
However, as the weeks progress, this short term disruption would subside.
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