International Maritime

COMMENTARY

By John McCauley

The Red Sea crisis has done much to dispel the prevailing balance of power between carriers and BCOs .

The years 2016 , 2019 and 2021 were all times of major swings in annual contract negotiations between beneficial cargo owners ( BCOs ) and ocean carriers . Historians will no doubt point out other equally turbulent times before these . If you asked me in late September what I thought would be the likely outcome of 2024 negotiations , the answer would have been simple : there would be a further market shift downward at the global level of rates and accessories that were already heading that way and had done so for the preceding 12 to 18 months .

The reasoning is that overall trade relative to available tonnage capacity in TEU terms had returned to favor demand — i . e ., BCOs . At the regional or trade-specific level , there remain exceptions due to systemic and structural issues such as the Panama Canal drought conditions and the ongoing port delays in Australia creating supply shortages .

However , the current Red Sea crisis has lifted the lid on new factors , and consequentially , done much to dispel the binary view of the prevailing balance of power between carriers and BCOs . The crisis has several dimensions that differ from previous years , notably the near-term effect on vessels needing to deviate via the Cape of Good Hope with corresponding surcharges to compensate for the extra vessel costs .

If carriers decide to head to the Red Sea either south or northbound and run the risk of needing to deviate via the Cape , that is an operational decision based on a known risk and BCOs should not have to pay for the carrier ’ s decision . If the near-term decision for all carriers is to travel via the Cape , then any BCO should at worst have to pay a temporary surcharge based on the net difference in operational expense for carriers via the Cape versus the Suez averaged over the entire nominal capacity of the vessel . The net short-term effect is that supply is short relative to demand .

Navigating imbalances

In the medium term , the artificial supply and demand spike will surely rebalance whether carriers continue for a longer period via the Cape or are able to resume passage through the Suez , assuming no additional injection of tonnage beyond the current new ultra-large container ships already scheduled for delivery . However , in the near term , this will mean that for current negotiations up to at least March , carriers may be in a stronger position to either increase base rates , excluding surcharges , or at least resist any further decreases .

Finally , carriers are starting to see significant shortages of equipment in demand locations . This is both a structural issue of supply and demand imbalance going beyond port to port but also a function of lower port utilization affecting carriers ’ schedule reliability and capacity with significant impacts for both BCOs and carriers . Some BCOs are opting for short-term contracts of three to six months , which are difficult to manage administratively depending on the number of lanes shipped and the nature of the sale . This tactic largely seeks to benefit from existing low rates and may be attractive to carriers should supply and demand show that demand is increasing above normal supply . If the near-term issues continue , this tactic may not bear fruit for quite some time .

Paying a premium ?

Most BCOs are interested in stability and are prepared to pay a modest premium for that assurance of supply . The big question for those BCOs is what constitutes the baseline over which you pay a premium . Last year ’ s rates or those in 2019 ? The carrier ’ s marginal cost / net contribution margin plus 10 %?

Therein lies the dilemma for both carriers and BCOs , given — as a general rule — no one wants to walk away from a deal nicely saying no , but everyone wants a degree of coverage whether it be for carriers for an estimated volume or supply to enable supply chains for BCOs .

What seems very likely is if you are a BCO who contracted very low rates in the last round of negotiations , you will likely achieve “ standstill ” at best for the next year . And even if you get those freight levels again , you may find capacity above contract does not exist or exists with a premium or a surcharge . If you are at or above what carriers would view as being an acceptable market level , then the BCO may find a little wiggle room between carriers but should not expect reductions of multiple 10s of percentage points . It is more likely you will be paying higher rates , so the question is what risk do you want to cover : supply of space and equipment or price ?

John McCauley is a shipping industry veteran with experience working for carriers and beneficial cargo owners and as a shipping agent .

email : john-mccauley1 @ outlook . com

18 Journal of Commerce | February 12 , 2024 www . joc . com