Red Sea risk is back: pricing it into 2027 sourcing contracts

Container spot rates on the main Asia-Europe trades have been falling since July. Carriers have also been sending more ships back through the Red Sea since June, which adds effective capacity and pushes rates down further. On paper this is a buyer's market. But anyone who sets next year's sourcing terms on today's spot rate is pricing one scenario, the benign one, and ignoring the one that played out in 2024.

The reminder came this month. FreightWaves reports that the Houthis have launched repeated missile and drone attacks on Saudi airports and energy infrastructure, including Aramco's headquarters, and that since July they have tried to close the Bab el-Mandeb Strait to Saudi-linked traffic. No broad closure of the waterway has been confirmed. Even so, spot rates on both main Asia-Europe trades are still above $3,000 per FEU, around 70% higher than a year ago, and a new wave of attacks could reverse the return of carriers to the route.

The Suez route is commonly cited as carrying around 12% of global trade and roughly 30% of container traffic. When carriers divert around the Cape of Good Hope, as they did from late 2023, Asia-Europe voyages take about one to two weeks longer and spot rates can multiply within weeks. Importers on fixed annual freight assumptions took the hit.

The asymmetry buyers keep underestimating

Freight is a fat-tailed cost. In a normal year it is a small share of landed cost for mid-value consumer goods from China. In a disrupted year it can briefly become one of the biggest lines in a small importer's P&L. The distribution is not symmetric: rates rarely fall as fast as they rise, and war-risk insurance premiums go up faster than they come down.

The mistake is treating the current soft market as the baseline for a 12-month contract. A better baseline is a weighted blend of three scenarios: continued softening, a short disruption of a few weeks, and a sustained closure of the corridor for a quarter or more. Price only the first and the counterparty, supplier or carrier, keeps all the upside when the second or third arrives.

What this means for contract language

The practical response is not to pay more today. It is to write contracts that share the volatility fairly. A few moves that pay off in any scenario:

• Shift from FOB to a flexible Incoterm (FCA, or EXW with a forwarder you nominate) so that you, not the supplier, choose the routing when the Suez route is disrupted.
• Add a freight escalator clause tied to a public index (SCFI or Drewry WCI) with a defined collar: for example, the buyer absorbs the first 25% move and the two sides split anything beyond it.
• Fix unit prices ex-works but keep freight on a quarterly reset, rather than annualising a rate that will almost certainly be wrong by the third quarter.
• Ask suppliers to quote lead times in two scenarios: Suez-routed and Cape-routed. A supplier who cannot do this is thinking about the factory gate, not your supply chain.
• Pre-qualify at least one alternate origin (Vietnam, Turkey, Morocco or Eastern Europe, depending on category) for any SKU where a six-week delay would cause stockouts or downstream penalties.

Routing belongs in the sourcing conversation

The traditional split, where procurement owns the supplier and logistics owns the shipment, breaks down in a volatile corridor. If a Chinese supplier insists on its own forwarder and FOB Shanghai, the buyer has no visibility on whether cargo goes via Suez, via the Cape or is transhipped through a Gulf hub. The three options produce different arrival dates, different war-risk surcharges and different exposure if a vessel is diverted mid-voyage.

A Gulf hub such as Dubai adds optionality: air freight for urgent SKUs, sea-air combinations, or a different sea routing to Europe or Africa. That is why we look at routing at RFQ stage, and why quotes on Opifix include freight and duty rather than leaving them for later.

The near-term call

Over the next two quarters, spot rates are the wrong signal. Watch instead the pricing of war-risk insurance for Gulf and Red Sea transits, carrier blank-sailing announcements on Asia-Europe loops, and whether the major alliances keep Cape-routed schedules published as a standing option. If any of the three turns, accelerate your renegotiations instead of waiting for them.

For buyers finalising 2027 commitments now, a quiet market is the chance to lock terms that hold through a loud one. Flat annual freight rates are not that. Flexible Incoterms, index-linked escalators, a second origin and routing options are. Writing them in costs very little. Leaving them out, if the corridor closes again, can cost a large part of the year's margin.