4170 Stillwater Drive, Duluth, Georgia 30096 | 678.576.0562 | carlos@cavazquez.com | cavazquez.com The 2024 ocean cargo forecast: a tale of too many variables We’ve been posting our 2024 modal market outlook series over the past several weeks. These predictions cover various transportation modes from a budget, service and industry perspective. We began with NTT DATA’s Kevin Zweier on trucking and its outsized impact on logistics budgets. Micheal McDonagh from AFS Logistics focused on carrier strategies amid shifting policies on parcel freight. Now we conclude the series with John Westwood from Gemini Shippers and his forecast for the too - dynamic - at - the - moment ocean ma rket. Fortunately, we’re past the pandemic hangover We’ve all experienced an extraordinary transformation of ocean cargo since 2020. The pandemic brought surging, unstable rates that set the industry on a new heading. But that course didn’t last long — demand and rates dropped abruptly in 2023 What disruptions are affecting the ocean market now? Global events are disrupting international trade. Vessels transiting the Suez Canal and the Red Sea are often diverted due to attacks on commercial shipping. Conflicts in Ukraine, Russia, Israel and Gaza, as well as political tensions with China, Iran and North Korea, also contribute to increased risks. In response, retailers should build resilience and diversification through localized sourcing strategies and regionalization. 2024’s concerns aren’t so different from last year The impact of low water levels in the Panama Canal and military conflicts mean the first half of 2024 is bound to be unpredictable. These could lead to vessel rerouting limitations and asset imbalances reminiscent of those experienced during the early days of the pandemic. Pricing pressures and responding to geopolitical risk Carriers had been trying to increase their prices in the second half of 2023, but they’ve only recently been successful. These price increases are now possible as carriers now face additional costs from rerouting vessels headed toward Europe and the US East Coast. Trips are longer, and alternate routes for East Coast shipments are causing the spread between East and West Coast rates to exceed the benchmark of $1,000. 4170 Stillwater Drive, Duluth, Georgia 30096 | 678.576.0562 | carlos@cavazquez.com | cavazquez.com Furthermore, carriers reduced the percentage of accounts they handled on a contract basis, sending more cargo to the spot market. Insurers and vessel owners closely monitor the situation and examine the limits of war - risk premiums. As a result , they may — for example — e ntirely avoid the Red Sea. Insurance companies are trying to reduce risks, but there are no clear solutions to these problems. If the Red Sea situation doesn’t get better, insurance companies will have more sway over cargo owner activities The consensus: It’s only a matter of time before tensions flare up. How much the industry will endure before conditions improve is anybody’s guess. The reality: it’ll never be entirely over Like the ongoing issue of Somali piracy, incidents may dwindle over time, but they’ll remain a threat. Carriers always claim that they protect their ships and crews. Yet, during the piracy crisis, they didn’t stop sailing through the dangerous Straits of M alacca in the 90s or the Gulf of Aden. We continued to use the Panama Canal during the 80s despite US conflicts in the region. More to the point, dangerous cargo — liquid natural gas (LNG) tankers and ultra - large crude carriers (ULCCs) — continue to sail. Additional risks to watch for As shipping companies reduce capacity, this will lead to a backlog of containers that’ll last through May as carriers negotiate better contract rates. T here’s also a chance that the International Longshoremen’s Association’s (ILA) contract talks in September will cause port delays or strikes on the East Coast. This could make supply and demand metrics more unpredictable. Complicating short - term matters are the sale of HMM and the break - up of the 2M Alliance between MSC and Maer sk. The recent push for zero - emission container shipping will become more intense. By 2030, it’s estimated that zero - emission ships will cost between US$30 and $70 per twenty - foot equivalent unit (TEU) on the Chinese coastal route and $90 to $450 per TEU on th e transpacific route. While a positive development for reducing carbon emissions in the shipping industry, it also means that there’ll be additional costs for shippers. For example, the EU Emissions Trading System (ETS) imposes taxes on carbon emissions, creating additional expenses. To avoid these, carriers may resort to evasion strategies. One approach is to call at non - European Union ports, which can reduce costs. However, this will result in longer transit times and reduced reliability due t o more transshipments. Shippers will need to carefully consider the trade - offs between cost savings, service quality and the impact of environmental regulations when making these decisions. 4170 Stillwater Drive, Duluth, Georgia 30096 | 678.576.0562 | carlos@cavazquez.com | cavazquez.com Finally, in addition to the challenges posed by emissions protocols, there may also be delays for cargo bound for the interior of the United States. Specifically, cargo transported via the Inland Port Intermodal (IPI) system may experience delays of three weeks or more. These delays are a result of increased dwell times due to railcar shortages on the West Coast Benchmark and watch where rates go T here’s a correlation between spot rates in December and ensuing contract renewal rates. The higher the spot rates in December and Lunar New Year, the more pressure there is to push contract rates up at the start of negotiations. However, we’ve recently seen spot rate reductions of between 20 and 40 percent in March — depending on the year — except for the 2020 – 2022 COVID - 19 years. Since the 2008 financial crisis, there’s only been one year with a flat market. New Contract Rates What’ll rates be for the upcoming contract season, given the elevated spot rates we've seen to start 2024? Several factors are working together to support higher rates this year. However, there aren’t any signs of another significant demand increase like in 2021. Despite this, consumers are still purchasing goods and there's ongoing inventory restocking, so market demand is healthy. However, it’s unlikely that we’ll see a market frenzy as we did in 2021. Contract rates will eventually decrease when there's more supply than demand ... and there’ll be. We may see some temporary hiding of ships, given the longer transits due to the Red Sea conflict. However, there's no reason for rates to remain high throughout the contract period unless other unforeseen circumstances, such as a renewed COVID - 19 thre at or any of the other factors discussed above, arise. Being ready: w hat you can do It’s crucial to take ownership of your supply chain and coordinate procurement of products and freight effectively. Give these strategies a try: • The longer you wait out the market, the lower rates you can expect to receive. Initial bids may be more in line with spot rates and thus higher than current contract rates. However, spot rates are already starting to come down as the market settles. If you are “waiting things out,” remember to extend current contracts to avoid booki ng gaps. Focus on a three - pronged procurement approach involving direct contracts with ocean carriers, relationships with non - vessel - operating common carriers (NVOCCs) and partic ipating in shipper associations. • Have backup routing and port options for major products. Consider a dual - path strategy using providers that go through the Panama Canal and others who 4170 Stillwater Drive, Duluth, Georgia 30096 | 678.576.0562 | carlos@cavazquez.com | cavazquez.com use mini - land bridge (MLB) routing via the US West Coast for East Coast cargo. You’ll need to book providers 2 – 3 weeks in advance. Be sure and stick to the number of boxes you’re committed to — don’t bait and switch. Likewise, add 2 – 3 - week buffers to transit times and budget for surcharges. Finally, choose stable routes and anticipate potential bottlenecks. Contact us and see how NTT DATA Supply Chain Consulting’s Transportation practice will make sure you’re prepared to take advantage of market conditions. 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