Global Maritime Focus

Special Report

It all depends on your value to the carriers and the current levels you are paying .

COMMENTARY

By John McCauley

Beneficial cargo owners ( BCOs ) will need to consider multiple macro factors — both immediate and long term — as they approach negotiations on their annual service contracts with ocean carriers .

First , is the possibility of the end of militant attacks in the Red Sea and Gulf of Aden . Any resumption of sailings through the Suez Canal will happen , at best , by mid-year . It is also necessary to factor in a three- to six-month delay in carrier schedule and shipper / consignee supply chain adjustments from any cessation of hostilities . My view is to plan for no resumption of Red Sea transits in 2025 .

The second factor is whether seasonality will continue at historical levels or we will see some smoothing of demand and volume similar to that which we saw in 2024 and partly in 2023 . Those BCOs that can smooth demand , having fought the internal battle to minimize transportation risk , have largely done so to the degree possible allowing for increased warehousing and higher working capital from increased inventory .

Therefore , I expect in 2025 that there will be some improvement in volume smoothing , but nothing game changing .

Thirdly will be the supply situation . Much has been made of the new tonnage coming into service , and indeed without Suez transits there would be overcapacity on the Asia-Europe trade . However , the new capacity will be asynchronous with demand , particularly in the trans-Pacific .

Another significant supply side issue is the sheer scale and size of Mediterranean Shipping Co ., which now operates about 20 % of global container capacity . Their impact will be at least twofold : for any BCO with reasonable volume , purely on berth capacity and schedule alone , you will likely need to use them .

But more importantly , they were the traditional price makers when they were on par with others in capacity terms and part of vessel-sharing agreements / consortia and were often the earliest movers in the market . Will that continue given their market share and agile and adventurous commercial actions ? Not so easy when you are a solo player .

Finally , do not expect improvement in service levels beyond ( at my best estimate ) 60 % to 65 % globally . While I am healthily skeptical and highly hopeful that Gemini Cooperation will deliver on its service level target of 90 %, this will not kick in until first shipments start arriving in at least the second quarter of 2025 .

Options for BCOs

So , where does all this leave BCOs trying to make sense of who to contract with and at what levels in 2025 ? The likelihood is that we are in balance in a buyer ’ s market with two caveats : it all depends on your relation and value to the carriers and the current levels you are paying versus spot and forward freight agreement ( FFA ) projections for the third and fourth quarters of 2025 .

If you choose to commit for a full year — indeed , in the current and near-term environment , the likelihood of carriers wanting to contract for less than one year without a significant risk premium is very low — this leaves several options , any of which may suit your business or not .

You can go long this year , committing all your volume to a range of carriers , but being sure to include standalone liners and one from each of the main alliances . Pretty traditional , but at least this locks you in . The quid pro quo for this commitment must be next to zero surcharges throughout the life of the contract . This will mitigate short-term shocks during the contract ’ s duration .

The more adventurous option will be some form of index linked for a portion of the volume , accepting the risk of fluctuation . This also means you must lock in your critical lanes and product lines . Again , keep an eye on surcharges .

The most aggressive option would be a mix of contracts for key volumes / lanes with a proportion on the spot market . Your level of conviction of supply-side easing and a Suez reopening needs to be very high , and even in those scenarios coming together , carriers will still blank sailings and even lay up capacity , so the reward may be elusive .

With no constraints , I would lock in my key lanes and buy FFAs to hedge up to 50 % of the upside risk .

In summary , it won ’ t be an easy year — are they ever ? — with the potential for rates to increase , but more likely to fall , particularly on trades outside North America . For the trans-Atlantic and north-south lanes , I expect little change while I remain convinced the surge in US imports will be unsustainable .

The outcome and impact of the US presidential election is a further wild card not included in the factors above !

email : john-mccauley1 @ outlook . com

24 Journal of Commerce | December 2 , 2024 www . joc . com