Asia-Med Rates Turn Up as Suez Hits 60%

0:12 You're now listening to the Supply Chain Secrets Podcast, the Ultimate Insider's Guide for All Things Ocean Shipping, presented by Nightjack.

0:26 Hello and welcome everyone to the Supply Chain Secrets Podcast. My name is Rich Heath. I'm here as always with Lars Jensen. Good morning, Lars. How are you doing?

0:35 Good morning, Rich. I'm doing great. And as you can see, I am back on the road in my Van Sally.

0:42 Absolutely. And obviously this week we've got a slight delay for the podcast. We normally record on a Monday morning. It's now Wednesday morning. And I think with all the travel that you're doing, Lars, we expected to have the odd delay here and there. Naturally, I thought it would be, you know, when you're in the middle of some remote desert, but as you did the podcast a couple of weeks ago from a beach on the Atlantic in the van, that wasn't to be the case.

1:06 But tell us where you've been this week.

1:08 Yeah, this week I actually went into Mali and the capital of Barmco, and it turned out that at times internet was great, at times it was a bit flaky. Unfortunately, it was flaky when we tried to record the podcast. And Mali, sadly, is one of the countries I could not drive into. The security situation is awful once you get out of the capital.

1:30 And for those that are interested, go read the Synchros Alley block. I made a write-up on that. My focus here on the Africa journey is to stay positive on opportunities, and I think I've done that in all the countries. The main thing to be aware about here about Mali is no matter how difficult it seems, freight always finds a way, despite the challenges.

1:51 But let's not mince words here. Mali is a difficult country, also for freight, and it definitely is a place where you need foods on the ground that know what's going on, and it is not a niche market that's going to be automated by AI anytime soon.

2:08 Yeah, definitely. A local programs and expertise needed. But it always amazes me just exactly where you can get a container for you in the world, who's freight always finds a way, doesn't it? Yes. Okay, we've got plenty to talk about today, as always. We've got a couple of new NIFI indices that we're going to talk about.

2:28 Of course, we'll also touch on the Middle East, we'll find more on the Red Sea. We'll cover reliability, we'll talk about the order book and Harrison as well. So, yeah, let's let's get into it. Where shall we start this week, Ralph?

2:41 I definitely think we should start with freight rates. We always do, but this week, let's have a look at what we can learn from the two new NIFI indications that's come out. Now we have one measuring specifically on Asia to Mediterranean, which supplements the North European one, and one that is Asia to US Gulf, which basically supplements the two other Trans-Pacific indicates we already have.

3:03 So let's start off in the Asia to Europe arena and have a look at both the UASia Met as well as the Asia North Europe. Because there are several things to notice on this. First of all, yes, they definitely do move quite a bit in sync. And I think if we click on the part that also says correlation, we can, as usual, get at least a measure of how well correlated this is.

3:28 And generally we can say, okay, there is a fair degree of correlation here. We wouldn't expect otherwise. It is not completely perfect. First of all, we do see an offset that has nothing to do with the correlation seen over the full length of the data that's available. Usually, the Met on average commands a premium of around $800 per 40 foot compared to the North Europe rates.

3:50 But we can also see some major discrepancies here. We can especially see here over the last year or so also some significant deviances. And we should not really be that surprised. Because under normal circumstances, and by normal, I am now looking back before Hormos, back before the Red Sea. Under normal circumstances, this is almost the same trait.

4:15 Usually back in the good old days, the rule of thumb was the very largest vessels did the Asian North Europe route. The slightly smaller vessels did Asia Met, because that was slightly shorter. And of course, you could have an overlap where an Asian North Europe vessel might stop by a transshipment up and service part of the Mediterranean.

4:34 So, of course, clear overlap. But this has changed with both Red Sea and Ormus. Let's take the Red Sea impact first. The issue with the Red Sea is that disproportionately impacted the Met. It is a longer detour to go into the eastern part of the Met by going all the way around Africa than it is just to go up to North Europe.

4:54 So already there we have a reason why we're beginning to see a larger premium for the Met compared to what we were used to seeing. Simply because it gets impacted more by the Red Sea and the longer detour. Then comes the Hormus, and the first thought anybody might have is what do we care about Humus?

5:11 This is Asia Europe, it doesn't go through Hormus. But let's also be clear here part of the cargo that went through Homus is cargo that went into the Saudi ports in the Persian Gulf. This cargo now goes to the Red Sea ports, which means it either goes down through Babel Mandep or it goes all the way around Africa and into the Met and then down into the Red Sea.

5:34 So de facto, some of the cargo that used to be Asia to Persian Gulf is piggybacking on the Asia Met. So that impacts also the Asia Met trade. So there's a lot of good operational reasons why the Met suddenly seem a larger discrepancy compared to North Europe. But despite these fluctuations, it is still a very high degree of correlation between the two.

5:59 Absolutely. And I think the interesting thing here is well, if we look at just you know the last week, um, here we see you know the med trade turning around, see the first rates increase for a while. I know we're gonna talk about normalization of services through the Red Sea a little bit later on. But I think you know, we've been looking at the Europe trades for the last few weeks, thinking about when we're gonna see the bottom, when we're gonna see the floor on that trade and see that stuff into turn round, and now we're seeing that on the med, which I think is interesting.

6:30 And then let's take a glance at the other new index we have out there, the Asia to US Gulf. And I think the most relevant comparison here is to match it up with the Asia to US East Coast, because basically these are two sub trades. They are operationally serviced practically in the same way. It's either via Panama or it's the long distance via Swiss or around Africa.

6:53 And the first thing to note here is, of course, seen over the lifetime of the index, we again here have an extremely high degree of correlation. Over most of the lifespan here, we do not see the separation that we otherwise see between Met and North Europe. So US East Coast, US Gulf, essentially one and the same when we look at price formation, except for the last two months.

7:16 And this I find curious. Because what we've seen in the last two months here is we see the Asia US East Coast rates go up, but then we have a lag time over to the Gulf Coast rates. So we are suddenly seeing a split the last two months. Whether this is a time-lag effect, and we will now get back on track, actually remains to be seen.

7:37 I, for one, is going to be monitoring the split between these two pretty carefully over the next weeks and months to see whether this was just a short-term aberration or whether there's suddenly a different dynamic at play here along the Gulf Coast versus the East Coast.

7:54 Yeah, I mean, as you said, over the long term they're extraordinarily highly correlated, which makes a lot of sense. But I mean, we know we've had a lot of disruption on this trade through the Panama in recent um months. Not sure if that's been driving it, but yeah, we can we'll keep an eye on this over the next few weeks and see how the rates see how the rates develop.

8:13 Yeah, and you're gonna say one hypothesis to at least move out for now that you mentioned Panama is if we get more severe restrictions in Panama, we could potentially see another gap opening up. I deliberate stress if, because even though we do have an extraordinarily strong El Niño season in full swing, water levels in Lake Gattoon are actually not as bad as could be feared.

8:38 They are lower than they usually are, but it is not yet the disaster scenario we have seen, for example, in 2023-2024. But should this deteriorate and create challenges, what we might potentially expect is a couple of Asia U.S. East Coast services that today go via Panama might get swung around and go via Suez instead, especially with normalization in Red Sea.

9:02 And if you swing those ones around, they are unlikely to be ones calling down into the Gulf courts, Gulf Coast ports. So that might change a little bit the supply-demand dynamics between East Coast and Gulf Coast.

9:17 We'll watch closely and see how that plays out. Okay. Was there anything else on the rates this week we wanted to talk about? Or was that a good segue into the Red Sea?

9:26 Yeah, I think this was the most important thing I think about because the developments in themselves are not really that extraordinary compared to what we are usually seeing. So I think that's the most important part we have seen for now in terms of rate rates.

9:42 Okay. In that case, let's let's talk about the Red Sea then and the continuing normalization that we see of services through the sewers.

9:50 Yeah, because this is basically really good news for everyone. I think those that have been following me on LinkedIn for quite a few years will have noticed I usually have this calendar in terms of which day of the Red Sea crisis it is. A couple of days ago, I actually stopped doing that. We reached, I think it was day 1050 something.

10:10 But the reason for stopping it is we're now at a point where 60% of the operating capacity, this is seen as a round trip on Asia Europe, is actually now been operated by the Suez with the recent changes the carriers have been making. This is not 60% across the board. Asia North Europe is around 40 to 50% normalized.

10:33 If you're looking into the MET on the headhold part, we are now 70 to 80 percent normalized. But if you look at the backhaul met to Asia, it's fluctuating between 80 and 90% normalized, depending a little bit on which week you're measuring on. So basically the carriers are now in full swing in returning back to the Red Sea.

10:55 And unless the Houthis change their minds, which of course they could, but if they don't, we should expect a full normalization to happen over the next couple of months.

11:07 So as you say, good news for everyone. It's interesting to see those normalization rates, and I know we're going to talk about backhaul a bit when we recover the reliability as well, but would we just expect this to keep going then over the next few weeks and we think we're just seeing more and more services come back through Suez until we are virtually a hundred percent normalized?

11:27 Is that the expectation?

11:28 That that is basically the expectation. These numbers are based on also the announcements. This is looking also six, eight weeks into the future, looking at what is the deployment plans for the carriers, what have they announced in terms of normalization? But if this proceeds, I was about to say, like clockwork, we're gonna talk reliability in a moment, there's no clockwork here.

11:49 But if this continues nicely, yes, we should expect carriers to continue to shift back. What does normal mean? Because normal does not mean 100%. If we think back in 2023, before the Red Sea crisis, it was not 100%. There were a few services on the backhaul from Europe back to Asia that actually did go around Africa.

12:14 So a normal situation can indeed include a few services that do go around Africa. It's not only in 2023, we have seen it at other points in time over the last couple of decades, that when you have a combination of, for example, overcapacity where you have ships available you have no other use for, or if you have the right arbitrage between what's your added fuel cost, but that's when you go slower, versus what's the cost of the Suez Canal.

12:42 There have been instances in the past where some services are going around Africa, not because of the prices, but because that's economically advantageous. So normal does not mean 100% goes via Suez.

12:56 Okay, but that's interesting that we have a potential blend as a normal situation, services going both ways. I was going to say there's a potentially slightly kind of confusing signal here, right? Because with more and more capacity going through the Red Sea, shortening transit times, that would effectively add capacity into the market.

13:18 But yet we are seeing on the med trades, we just discussed, rates you know, ticking up for the first time last week. I think many people think we're at a thaw on Asia to North Europe. We've talked the last few weeks about you know potentially more demand coming in as we build up to the challenges in year, sort of pre-challenging year peak.

13:37 But I find that a slightly confusing signal that we have potentially more capacity in the market, but yet rates kind of bottoming out and maybe even starting to increase.

13:46 Yeah, but I think that's something here that's extremely important. And I think there's a lot of people out there that might be confused when we say capacity, because what we really mean are two very, very different things. There's the capacity of the total fleet in the world available to use, and then there's a capacity operated, for example, from Asia to Europe.

14:06 If I operate from Asia to Europe, I might have a weekly service with one 20,000 TEU ship. That's 20,000 TU of capacity every week. If I then switch that back from Africa to Suez, it's still just 20,000 TEU capacity. So shifting from Africa over to Suez does not change the capacity offered on the Asia Europe trail.

14:30 It simply doesn't. But what it does is it releases vessels into the pool of capacity that you can use globally. So I think that there's a confusion sometimes. Do we talk global capacity or do we talk specific offered capacity in a trade lane on a weekly basis? Because these two are very different things.

14:51 So we do get more global capacity, more ships that can be deployed anywhere in the world, but simply shifting from Africa to Suez in itself does not change capacity on the Asia Europe trade. The only capacity change we have seen on that trade so far is Gemini's announcement of their new A18 or SE5 service from Asia basically into Al Jazeera's and Tangiers.

15:19 That's really interesting. I think I see a lot of news about this capacity change in the normal ovation. I think it's great to have that viewpoint on it. But actually, the weekly capacity is not changing at all. It's the global capacity that could be affected.

15:32 Yes.

15:34 Okay, and on the kind of capacity notes, maybe that moves us into the reliability side of things. So I know that there was some reliability figures that we wanted to cover today as well. An interesting now as well on the reliability in different directions.

15:50 Yeah, because if we look at it, sea intelligence came out with the new data for all vessels that arrived during September, and that was only a marginal improvement compared to August. So we are still hovering around the 50% mark. We flipped from just below 50% to just above 50%, doesn't really matter.

16:07 It's a marginal improvement. What is a lot more interesting is if we look at the alliance performance, because they also measure average alliance performance, of course, only on the East West trades where the alliances are active. And in this case, for the first time since we saw all the new alliances, Gemini dropped marginally below MSC.

16:29 So Gemini came in at 68% and MSC at 69%. This is the first time we have seen Gemini drop that low, and it's surprising they even dropped below MNC on that one. The other alliances are much further down. You've got Ocean Alliance at 45% and Premier Alliance at 42%. And the interesting part here is, of course, to have a brief conversation around what happened with Gemini.

16:54 They were promising 90%, they were delivering 90%, and suddenly they seem to have dropped completely. But this is where again the devil is in the detail. What is driving this drop? If you start to look at the individual trades, it doesn't mean that they are performing below their target benchmark everywhere.

17:14 Because they don't. Asia North Europe, a little like Atlantic, they were delivering 97%. So how come they came in that low? It's actually the backholes. Pacific westbound, so from North America back to Asia, they drop down to 50%. And much, much worse, Europe back to Asia, the big backhaul, all the way down at 26% reliability.

17:41 Of course, that doesn't change, that their overall number is way below their 90% target. That is what it is. But we should also keep in mind this is reliability measured on whether a ship arrived on time. It doesn't take into account whether that ship is filled with cargo or whether it is three-quarters built with their empty containers, which is the case with the ships that go back to ancient.

18:05 Yeah, the reliability on the backhaul is really low. And I wanted to ask a question about that. Of course, that will obviously have an impact on shippers who heavily ship on the backhaul routes. But I also wondered what that does for the equipment situation. As you said, of course, carriers use backhaul routes to relocate containers, you know, particularly as we come into this kind of pre-Chinese New Year ramp up, you would imagine that there's going to be demand to relocate containers back to Asia as quickly as possible.

18:37 And maybe that's also why we see more of the backhaul services through the sewers as well. Does that reliability have a potential impact on the equipment situation, or is it not a concern at this time?

18:51 I would not be concerned about it at this time, also because we are right now just past the golden week. We still have quite a lull, at least for likely the next month or so, for the Chinese New Year peak volumes to really pick up. So I would not be overly concerned about equipment repositioning and the low reliability at this point in time.

19:13 Okay, so not not something to be concerned about, though it's good. Okay. One of the other topics we want to cover was the order book and more news here in what has been a lot of news about new buildings over the last couple of months.

19:27 Yeah, because it is a recurring topic. We keep seeing, we've been seeing headlines for more than a year now in terms of how large the order book is. And we also keep hearing various versions of why the order book is not necessarily a huge problem, why we need the vessel replenishment, all kinds of good arguments that we need greener ships, that's all well and fine.

19:47 But the challenge is for the longest time now, it has been clear that the market will not be able to fully absorb the order book that we have, not without going into a cyclical downturn. And yet vessel orders keep pouring in. And when I say pouring in, if you just look at September and October, that that's all.

20:06 Just this month and last month, we have had 1.3 million TU of capacity added to the order book by the top 10 carriers. And to put this order book into perspective, just the top 10 carriers, just the new vessels they ordered the last two months, if you put all of them together, this in itself would be the world's eighth largest container line.

20:28 And that's just added orders in the last two months. We're not quite at 50% order book yet. We are thinking at 46, 47%. But this is becoming exceedingly high. And it's stretching all the way out into 2030. That's fine, it's gonna take a long time. But the challenge is we have not in history had a situation where we had a spike like this without going into a cyclical downturn afterwards.

20:53 This is not a record high order book. Let's be clear about that. It was much worse before we headed into the financial crisis. That's not the territory we're in. But it is a very high order, and it simply keeps being added to it.

21:08 Yeah, I think I mean when you use that analogy of saying, you know, on its own this is the eighth largest container line in terms of new capacity. I think that's really striking. What I wanted to uh ask you about this is do we know the distribution of those orders? I mean, could the vessels on order go anywhere, or are there kind of certain trades which they're gonna have to come into, and then we see older vessels cascade into other trades as it split across classical sizes?

21:34 It is to some degree split. Some of these orders are in the mega sizes, so the 24,000 TU. There clearly are some handfuls of those. But otherwise, we do see them in the classes slightly lower than that. So we do see them in the 10,000, 14,000, 16,000 TEU size ranges. But that still means if you are not in trades where like Asia Europe, where you already have the mega maxes, you should still be prepared for a situation where vessel sizes will go up.

22:04 Trans-Pacific, if you look specifically at Pacific, Asia to US West Coast, median vessel size there is still less than 10,000 TEU. I do not believe that number two hold term over the next two to three years as we get the order books. So a trade like the Pacific to the US West Coast is highly likely to see an increase in vessel size.

22:24 Not that we're going to see normal deployment of the 24,000s there, but you might see a much more normal deployment of 14,000, 16,000, 18,000 there at the expense of service frequency.

22:37 Interesting. But as you say, you know, coming on stream over the next few years and pushing 2029, 2030, so a long-term, long-term picture to watch how this changes. And then finally for this week, tariffs. I think we touched on tariffs for the first time in a long time last week, and then more news, and of course, related to the US again on the tariff situation.

23:01 Yeah, it's just one more link in this long chain of unpredictability of the tariffs. In this case, it's another dispute with Canada. Not really dispute. There's apparently now an agreement with Canada that the US agreed to accept some of the Canadian goods from 50% tariffs, which is, of course, great if those are the goods you're importing into the US.

23:22 This is stuff like a number of different packing materials. It is seaweed for human consumption, different types of industrial machinery. Which of course is great if that's what you're importing. But nothing apparently comes for free. So now there's a range of other goods that will be slammed with a 50% tariff.

23:40 And that is quite an extraordinary blend because that includes cocoa powder, canoes, but only if they are shorter than seven and a half meters, shampoo and soap, archery articles, carpets and floor coverings, paint. And here comes the fun part: some packing materials. So, yes, there are some types of packing materials that will now be exempt from the 50%, but then there will be other types of packing materials that will now get a 50% tariff.

24:09 I honestly do not envy the US importers that need to navigate this because this goes into effect in two days from us recording it here on October 30th.

24:18 Wow. So really no time to adjust to this at all. You say quite a complicated picture of what's included and what's now exempted.

24:28 Yes.

24:32 Okay, I think that covers everything for this week in terms of news and what's moving the markets. We have at times had a little bit of for internet connectivity, but I think as I say at the start of the show, we're expecting that a little bit as you do your travels around Africa. But thank you, Lars.

24:50 As always, fascinating to hear what's what's going on in the markets this week. Laz, I know you're all travelling again this afternoon, but we should be back at the usual time next week. And until then, thank you all for listening.

25:03 Thanks for listening to the Supply Chain Secrets Podcast, presented by Night Jack. Be sure to subscribe on your favorite podcast app.