KERRYCONNECT - JANUARY 2024

Contents

1. Executive Summary & Business Tip
2. Market Trend
3. Ocean Freight Updates
   • Ocean Freight Snapshot
4. Air Freight Updates
   • Air Freight Snapshot
5. Customs, Inland Transport, Terminal & Regulation Alerts
6. Supply Chain Innovation

Executive Summary

The global shipping industry is currently facing significant challenges due to the Red Sea crisis, leading to substantial disruptions in ocean trade. This situation has resulted in Maersk halting transits in the region and a sharp increase in freight rates, exceeding even those seen during the COVID-19 pandemic. The crisis is primarily impacting shipping capacity, unlike the demand-driven disruptions of COVID-19.

In response to the crisis, there's a likelihood of increased freight rates and potential shifts in trade routes. The industry also faces challenges from rising oil prices, environmental regulations, and fleet renewals.

In Oceania, the DP World industrial action in Australia continues to cause major delays and economic impacts, exacerbating the global shipping challenges. This is coupled with issues at the Port of Melbourne and overall port congestion.

The air freight sector is experiencing a surge, possibly due to a shift from sea to air transport as an alternative to the delays and disruptions caused by the Red Sea situation.

Regulatory updates, such as the increase in charges at the Port of Auckland and the latest Australian Border Force compliance update, are additional factors influencing the industry.

Business Tip

Market Trend

The Red Sea Crisis continues to be the hot topic for the start of the year, largely due to the domino effect of its impact in global ocean trade. With A.P. Moller Maersk announcing the extension to pause transits “for the foreseeable future” and rates increasing faster than what we saw in the first month of COVID, it is highly unlikely that this situation will be resolved before the Lunar New Year. Disruptions like this are a proven recipe for driving up shipping costs – the more chaotic, the bigger the freight rate inflation will be.

In the best-case scenario, if trade starts to flow through the Suez Canal again shortly, the normal market dynamic will almost immediately come back into play.

In the worst-case scenario, whereby the Suez Canal must be avoided for the entirety of 2024, assuming a 30% increase in trade distance for the roughly 30% of the container ship capacity that previously transited Suez, that would reduce effective capacity by some 9%.

Freight rates outpace rate increases seen during COVID. Comparisons are being made between the effects COVID caused on shipping rates, and the effects currently being caused by the Red Sea crisis. Whilst both events triggered ocean and port congestion, supply chain disruption and rate spikes, the biggest difference between the two is the pace of disruption and the time of year. What we're seeing now is a capacity crunch in the Far East as ships are not returning on time for their next scheduled departure. This in turn is seeing shippers willing to pay higher rates to secure that their cargo is among what is put on board the next available ship. The need to move goods is heightened due to the fast-approaching Lunar New Year – which will see factories in China and Taiwan shut down for a minimum of 7 days from the 10th of February. This is an annual event that sees demand artificially brought forward as shippers front load cargo shipments to ensure their goods are sent out before the shutdown. Experts mention that rates have not yet hit anywhere near the levels we saw during Covid-19, but the sudden nature of the Red Sea crisis has seen a more rapid increase in rates which is arguably creating even more disruption than during the early months of the pandemic. Rate increases for key trade lanes are over 300%, with the global composite showing increments of 20-25% per week and currently higher than 80% YoY.

The Red Sea crisis is causing an issue with available capacity rather than increases in demand, which was the main driver for disruption during the pandemic. Expectation towards it could be rate escalation, but the increase in rates expected in early February could potentially mark the peak in this crisis, with the possibility of rates beginning to fall back again towards the end of the month.

Carriers could potentially be invoking “Force Majeure” – they would be invoking the clauses in their BLs to increase pricing through surcharges to get compensated for re-routing. Interpretation is carrier by carrier, backed by the terms in their BLs.

The biggest impact of this disruption is based on the time of the year – as we are in traditional slack season (a relatively quiet season for shipping after end of year celebrations), carriers will need their ships to be back in Asia following the upcoming Chinese New Year when demand increases. This means in the current situation; the unresolved disruption might get worse.

Outlook For Q1

Pricing wise, Global freight rates (spot and contract combined) were expected to drop by one-third in 2024. This prediction is heavily impacted by the complex ongoing situation of the Red Sea and the reopening of the Suez Canal Route. A swift return to using the Suez Canal will reset the container market’s supply and demand balance, resuming the standard global market dynamic and stabilizing the otherwise heightened rates we are seeing.

Volume wise, regional port and trade lane statistics had all a positive outlook, with predictions that volumes (both total throughput and loaded containers) would get close to break-even by the end of this year, with some upside growth potential.

Oil prices will climb, threatening more inflation and reduced consumer spending power, pushed by the attacks in the Red Sea. Higher energy costs will once again squeeze consumers and reduce their discretionary spend, hurting demand for containerized goods.

Many carriers were renewing their fleet to align with environmental regulations, but they are not getting rid of the older fleets quickly enough. This year’s demolitions are estimated to be around 115K TEU, with a predicted spike to 600K TEU next year. Over capacity will be a challenge in the upcoming future. The balance of supply and demand sees a predicted 6.4% growth in supply versus a 2% growth in demand.

Developments in Oceania

Regarding the DP World Industrial action, the Maritime Union of Australia (MUA) and Australian transport minister Tony Burke held an unsuccessful meeting, with the port strikes continuing.

Led by the MUA since October 2023, the protected industrial action has included 24 hour strikes and work stoppages, causing a backlog of 55K+ containers across the four terminals of DPW and threatening to exacerbate the cost of living, reportedly costing the economy A$ 1.34bn.

• Rates continue to face pressure in Q1 2024. Expect abnormal blank sailing programs to reduce capacity, along the surge prices derived from the Red Sea Crisis.
• Port congestions for SEA transshipments and terminal delays from the ongoing DPW Industrial action are causing the utilization to come in short supply.
• Pro-Palestinian protestors blocked the Port of Melbourne (VICT), now reopened, with the impact delaying about 50K+ TEU across 5 vessels, creating a significant flow effect to more vessels as routes and berthing windows shifted.

Forecast Oceania

Ocean Freight Updates

• The red sea and Suez Canal disruptions are a critical situation involving worldwide shipping. Stay informed on how to mitigate effects. Check our piece on this news here.
• Space remains tight with irregular blank sailing from carriers in Q4 traditional peak, also DPW terminals are still under industrial action across Australia, impacting service and schedules.
• We are experiencing an average 10 day berthing delay for DPW terminals across the country and situation is expected to continue for some months in coming 2024.
• Space is all full before CNY, carriers booking utilization 100% to AU & NZ, lots of cargo being rolled and backlog is expected to flow into February, suggest placing booking at least 3 weeks in advance.
• COSCO shipments to AU Transshipment via Singapore are facing serious issues, with waiting times over 40-50 days in SIN until further notice. Shipments to NZ are steady with transshipment time of 2-3 weeks. Contact us for alternative routings.
• ANL has an equipment shortage of 40’GP/HQ in China and 20’GP in SEA caused by Red Sea Crisis, validity of EIR reduced from 48 hours to 24 hours.
• Shipping lines are being stricter on charges for container damages. If there is no evidence of prior existing damage, charges will apply. It is highly advisable to take photos of each container prior to loading to ensure evidence of prior state is documented, even if the container does not appear to have any damage.

Update on the Red Sea disruption

The evolving situation in the Red Sea is complex, with potential implications that span the entire maritime supply chain. It is crucial to stay vigilant, monitor developments closely, and be prepared to adapt operations in response to this dynamic situation.

Some points to take into account:

1. Increased Security Concerns. The instability in the region could lead to increased security concerns for ships traversing the Red Sea. This may require additional security measures, such as armed guards or enhanced screening of cargo, which could add to the cost of doing business.
2. Delays and Interruptions. Any political or military conflict in the region could lead to delays or even blockades of the Red Sea, disrupting the flow of goods. This could cause significant disruptions to global supply chains, as the Red Sea is a key shipping route connecting Asia, Europe, and the Americas.
3. Rising Insurance Costs. The risk of piracy or other attacks in the region could lead to higher insurance costs for ships operating in the area. This could translate into higher costs for shippers and freight rates – especially if uninsured.
4. Shift in Trade Routes. If the situation in the Red Sea persists, shippers may look for alternative trade routes to bypass the region, leading to changes in global trade patterns. This could affect ports and shipping companies that have relied on the Red Sea for revenue. This can, however, be an opportunity to explore alternative multimodal solutions.
5. Changes to services and rotations. Most carriers are reviewing their services and port calls to mitigate transit delays caused by diversion via Cape of Good Hope.

ETS (Emission Trading System)

• With the vision of complete decarbonization by 2050 backed by regulations, shipping lines have implemented charges to cover the costs of the European Union Emissions Trading System (EU ETS), with effect of 1^st of January 2024.
• The ETS is a key tool of the EU’s policy for reducing greenhouse gas (GHG) emissions.
• Currently, all ship operators must report their emissions and surrender allowances for every tonne of CO2 emitted during voyages within the European Economic Area (EEA), as well as 50% of voyages starting or ending in European ports.
• By 2024, shipping companies must cover allowances for 40% of greenhouse gas emissions, rising to 70% in 2025 and reaching full coverage (100%) by 2026. In other words, this is a growing cost that will increase incrementally up to 2026.
• Notably, there are considerable differences in the surcharge rates charged by different carriers. Moreover, carriers will adjust the surcharges at different stages, with some carriers indicating quarterly updates and some indicating monthly revisions.
• The cost of ETS for carriers is relatively minor compared to other expenses such as bunkers, port charges, or canal transit fees.

GEMINI Cooperation

• Maersk announced they would be disbanding their previous 2M Alliance with MSC in January 2025. Hapag Lloyd is currently a member of THE Alliance (with ONE, Yang Ming and HMM). THE Alliance’s contract was planned to expire in 2030. The premature withdrawal from Hapag-Lloyd from the arrangement leaves the remaining members of THE Alliance with limited options to fill the gap, and it’s expected they will operate at sub-optimal scale in 2025 until the imbalance can be redressed.
• The GEMINI Cooperation (Maersk and Hapag Lloyd) will be a long-term operational cooperation starting in February 2025. Both companies will provide dedicated operational teams to manage this cooperation, which comprises around 290 vessels with a combined capacity of 3.4M TEU, with Maersk set to deploy 60% and Hapag-Lloyd 40% of the capacity total, covering 26 mainline services.
• The cooperation will cover 7 trades: Asia - US West Coast, Asia – US East Coast, Asia – Middle East, Asia – Mediterranean, Asia – North Europe, Middle East – India / Europe, and Transatlantic.
• This shift will shift the capacity of the major shipping alliances, with new capacities around 3M TEU (THE Alliance ), 3.4M TEU (Gemini), and 8.3M TEU (OCEAN Alliance, comprised of CMA-CGM, COSCO and Evergreen)

Ocean Freight Snapshot (up to Jan 30th, 2024)

Check our snapshot for a quick glance on space, rate, equipment and transit times for Oceania

Air Freight Updates

Global air cargo tonnages have bounced back in the second week of 2024 following their typical slowdown in the second half of December and the first week of January, according to the latest figures from WorldACD Market Data, including double-digit percentage increases in demand to Europe from Asia Pacific and from Middle East & South Asia in the last two weeks that may reflect some modal shift to air due to disruptions to shipping in the Red Sea.

Preliminary figures indicate that global air cargo tonnages rose +24% compared with the end week of 2023, based on the more than 400,000 weekly transactions covered by WorldACD’s data. These patterns are broadly similar to those of previous years, although that +24% tonnage rebound in week 2 was stronger than in the equivalent week last year (+19%).

Red Sea-related demand is happening, enquiries rise

The airfreight sector is yet to see any solid rise in demand related to the Red Sea crisis, but customers are enquiring about alternatives to sea transport. While there is an expectation that vessel diversions away from the Suez Canal route and around the Cape of Good Hope due to attacks on vessels will result in supply chain disruption, this is yet to get to critical levels. However, several companies are looking into multimodal alternatives to circumvent the delays and rising costs, specially close to CNY, with Sea-Air being an alternative solution.

Air Freight Snapshot (up to Jan 30th, 2024)

Customs, Inland Transport, Terminal and Regulation Updates

Port Of Auckland (POAL) increases charges

The ports sector is continuing to review ways to spread the cost of essential infrastructure upgrades across the customer base. POAL has readjusted container handling via infrastructure levy, container pick-up (peak time, off-peak time) and stevedoring amongst other charges. Please contact our team for adjusted costs for your shipments.

Goods Compliance Update - December 2023

After nearly six months between editions, the latest Goods Compliance Update has been released in mid January by the Australian Border Force.

You can access the issue here.

DP World Industrial Action

After an unsuccessful meeting in January 2024 with the Australian Transport Minister, no consensus has been reached. The MUA is wanting a pay rise but negotiations with Dubai-based ports operator DP World have so far failed. The ongoing cost of the stop-work action is costing the economy millions a week, with direct impact on export and import products. The delays are specially critical for chilled meats, which make about a third of Australia’s meat exports, since they impact shelf life and reduce the ability to meet export contracts.

Would you like to understand more about the situation? Check our snapshot here.

If you would like to receive updates on the situation, we invite you to subscribe to our customer advisories, where we let you know of events that can affect your supply chain as they happen:

For our list of past advisories and keeping an eye on what’s happening, you can follow our advisories on our website in here.

Supply Chain Innovation

• Swiss company Kardex partnered with Indian firm Addverb to integrate compact storage systems with innovative warehouse management technology, aiming to provide optimised storage processes globally.
• Turvo collaborated with Oko to enhance supply chain operations through data automation, enabling 3PLs and brokers to create orders and shipments quickly via email.
• The global market for AI in transportation and logistics is projected to grow at a CAGR of 23.4% from 2023 to 2030, reaching $15.2 billion, driven by efficiency, cost-effectiveness, and optimisation in transportation and logistics operations.