Spreads Narrow, Northeast Asia Swings, Hormuz Heats Up

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

Hello everyone, welcome to this week's edition of the Supply Chain Secrets Podcast. I'm Richie and I'm here as always with Lars Jensen.

Lars, how are you doing today? I'm doing excellent. I'm dialing in from a nice little courtyard here in what's called the Selum River Delta in the middle of Zinegal.

Looks very nice indeed. It's a grey, rainy, autumnal day in London. Pretty pretty jealous for you today, Lars. That looks fantastic there. We've got uh a busy show, as always, for today. We're gonna talk freight rates, of course, look at the major trade, or touch on the Middle East, as always, and the situation there.

And then we'll talk a little bit about supply and politics and tariffs as well, which is a word that we probably haven't mentioned for a little while on the podcast, but we will talk about again today. Lars, where should we start for the rates today?

I think we should start on the Trans-Pacific and have a look to start with on the Ace to US West Coast trade. And there's a couple of elements I want to point out if we start looking at them. Because if you just look at the overall rate, what we have seen in the last few weeks, and we've talked about it on the podcast before, is flattening out.

But if we expand this to also show the spread in the rates, we've also discussed this topic on a few previous occasions. As the spread increases, that tends to also signal much more uncertainty in the market. As we can see here the past week, the spread is still large. However, if you actually type in and do the math, it is narrowing a little bit.

Spread the past week is about $1,500 per 40 foot. Sounds like a lot. But this comes out of a period where the spread was actually 2,000. This is a spread between the 10%, 10% and 90% levels here. So it does appear that this flattening out of rates comes along with a little more certainty amongst the market participants in terms of what the market will do.

So this also kind of signals it's the end of the bull run for now.

Absolutely. I think when we look at this out of time, as we can do with the index, and it's pretty clear, isn't it, that when that sprint starts to narrow down, it often means that the market kind of found the level or we're potentially looking at the market turning feed. And I think we're all pretty sure that we're just about at the top for this trade.

Yeah, exactly. Um another interesting element I want to pick on here, and if we just stay with the Asia to US West Coast trade, that is something if we look into some of the sub-indices. And what I want to do is to only look at two, not three of them. I only want to compare the overall index to the ones where we have cargo originating in either Southeast Asia or Northeast Asia.

Because the reason I don't want to see China, I don't want to show China, is because China basically follows the overall index, which to some intents and purposes should not really be surprising. The majority of cargo volume actually comes out of that region as well. But what I want to point out here is we used to have a situation also where if you're shipping out of Southeast Asia and Northeast Asia, your rates pretty much followed the overall index, pretty much followed to the cube on China.

This has been disrupted here over summer. This peak that we have gone through have seen quite some variation amongst the Northeast Asia and Southeast Asia. And importantly, it's not just a matter of suddenly it is being offset. It is, for want of a better word, all over the place. Sometimes it goes down and follows the index, sometimes it deviates.

And this falls in line with also conversations we had earlier during the year on the podcast. One of the core drivers has actually been capacity on the Trans-Pacific trade. And when it comes to capacity, of course, a ship is a ship, but the carriers can choose, and at the last possible moment, how much of that do you allocate to certain ports?

As an extremely simplistic example, vessel goes from Shanghai to Business to Los Angeles. You can choose at the last possible moment, say, fine, I'm going to load extra volumes out of Shanghai. That will instantaneously reduce capacity out of Busan, impacting spot rates there. So I think this is one of the effects we see from dynamic reallocation of capacity.

And again, this is also symptomatic of a market that was somewhat pressured on capacity and a market that was somewhat unsettled. I might, of course, be proven wrong down the line, but my expectation would be as the market normalizes again and as we get into a more normal supply-demand balance, Northeast Asia and Southeast Asia would again come back to what we've also seen in the past, following relatively well along with the overall index.

After all, if you have at least a reasonable amount of capacity, it's a clear-on arbitrage between the different trades. But that to some degree broke down when the market was as unsettled. And yeah, you're showing it here as well, Rich. You can see it also when we are at some of the other peaks back in time, when the market gets really pressured on capacity, you tend to see these gaps opening up temporarily.

Absolutely. Although, as you say, this kind of period of decoupling seems to have been a little bit longer than we've seen in the past, don't we? With the the direction of rates being so unusual for this time of beer for such a long period of time.

Yeah, exactly. And we could also look at the US East Coast, you can say, by and large, the effect is the same, but there is a wrinkle on it that I think is worthwhile mentioning here. Because the wrinkle is it's really here only Northeast Asia recently that is decoupling. Because if you look at it here and look at Southeast Asia, it hasn't really decoupled.

It's only Northeast Asia. But this is down to plain and simple operational geography. Because if you're shipping from Southeast Asia to the US East Coast, well, basically if you're coming from China, you are passing there. Because these are the services that actually is applied either via Suez or around Africa.

Whereas Northeast Asia, that is an odd routing for Northeast Asia cargo to pass by Southeast Asia. So Northeast Asia is really the only one here decoupling, not the Southeast Asia ones, which is to some degree what we would also expect.

And these things have been pretty wild in the last few weeks, I think. And if we look at the low history and DC some decoupling, but Northeast Asia really has been extremely volatile over the last month or two.

Yeah, and again, basically illustrating if you are shipping out of this is basically South Korea and Japan, you are subject to whatever macro movement happens over in China. It's down to simple operational geometry here.

I think we're gonna move to what's been more of a boring trade, right? If there is perhaps a bit of a half month or two.

Exactly, the Asian Europe trade. And to some degree it continues to be boring because if we look at it, it is like clockwork continuing simply to decline. But what I find interesting here is if we look at the futures and especially also compared to what were at least some of the future market participants expecting last week versus what they are expecting this week.

What we do see then is we actually see a more bullish expectation heading into November. So what that tells me is the active participants over in the forward market here, they see we must be very close to the bottom now. They would basically expect rates to start increasing in November, which would be a relatively early start of the pre-Chinese New Year peak season.

Is there any reason to expect we would get an early start to the Chinese New Year peak season? Rationally speaking, I can't find one. But what we could point to is basically that's what we also saw for the summer peak. So the summer peak happened a couple of months earlier than what we usually see. So one argument could be maybe they're picking up on signals that could be an earlier start to the peak as well.

Whether it will happen or not remains to be seen. Just here, that was about half an hour before we started the recording the podcast here. I did notice, for example, MSC was out with an announcement of a new rate level of $4,500 a year coming into first half of November on their FAK rates from Asia to North Europe.

It should in that context also be mentioned. They had a similar announcement there two weeks ago for the second half of October, which didn't really materialize. So, but at least we see now carriers pushing for rate increases coming into November. So maybe the future market participants might actually be somewhat on the ball here that we should be about at the bottom of the market for Asia and Europe and then head in for an early pre-Chinese New Year pickup again.

Yeah, as you say, we'll have to see. I think it's it's important for people to remember the forward curves. They show where people are trading and not necessarily a prediction of the future, and sometimes they're off, but it's very interesting to think about how people are thinking about this. And when we look at the futures market, we see trading now on this particular contract spreading out into next year.

So we're seeing people starting to hedge the first half of next year in more volume than they were previously, which just speaks to some of the risks that we've talked about in the last few weeks around the whole supply-demand balance for next year. So I think the early path of next year on uh on these major trades.

Yeah.

And maybe just as an added comment from my side, you're right that you shouldn't treat the futures prices necessarily as a forecast, because one thing we need to also keep in mind is why would at least some stakeholders use the futures market? They might have other internal considerations. I might have a supply chain where it is important for me to settle down on a fixed rate for whichever reason.

My ambition that might not necessarily be to beat the market, so to speak, but I might have other interests aligned internally as well.

Absolutely. Absolutely. Okay. So I think that covers us on the trade side and what's moving in the market this week. Should we uh should we go back to some of the other topics around, I know you wanted to talk about the the Middle East and the situation in Horneese as well.

Yes, let's do that. Because for Hormous, for the I was about to say for the longest time here, several months, most of Hormoose has basically been around oil tankers and largely not really much container movement. What did become apparent here in the past week is that at least some of the local niche carriers have been actively trying to move some of their feeder-sized vessels through.

Unfortunately, that did not pan out well in the past week, where as much as four container vessels were attacked. All four were hit. One of them unfortunately sank. And the one that sank was the 2800 TEU GFS Pride, which is basically operated by Global Feder Shipping, which is owned by Abu Dhabi Ports Group.

The four container vessels, amongst them, are basically operated by entities owned by Abu Dhabi Ports Group and by DB World. And what it does flag here is that the risk is high. Not only is the risk high, but we have seen a dramatic increase in the amount of attacks from the Iranians over the past two weeks.

As a shipper, can you book cargo on board these? Sure you can. Subsequent to these attacks, I went and checked with all the major global carriers because most of them have online active schedules. And what you could see there was quite a few of them were indeed showing schedules of these feeder vessels.

That means that using this feeder, at least on their online propositions, was something presumably you could book on. So for shippers, it's the age old. Do you have your insurance in order? Because if you do book and get on these feeders and everything goes well, good for you. Uh if you do book and the ship sinks, you better make sure that your insurance actually covers moving through an actual war zone.

Absolutely. And insurance is not just the only thing that of course if you have cargo on a vessel and it actually sinks to have a huge impact on supply chains as well, doesn't it? Yes, it does into recovery.

No, and you can say from a shipper perspective, I can understand the temptation if somebody is offering you shipment where the alternative is the heavily congested land corridor, which is also extremely expensive these days.

Yeah, I guess there must be huge demand for that. Yes. Yeah.

But basically, that means the state of affairs in the Strait of Hormos is, if anything, worse now than it was just a couple of weeks ago. Uh, maybe just to add a comment over on the Red Sea, where of course we've been talking about it before the normalization. Uh, this was again about half an hour before we started the recording this podcast.

There was an announcement coming from Mosk and Habakloyd. Uh, they are now adding a new service to their Gemini service. And this is actually another step in the path towards what I would tend to say is the normalization. This is gonna be the Mosk is gonna call it the AE18, and Habak will call it the SE5.

So it is a new service, it will go through the Suez routing in both directions, basically going from China via Tantium Pillar Pass and then only going to Alge Zeros and Tang Tierz. That's it. That's all it does. So it's a service that will then service, everything will then be transhipped in 10 years and Al Jazeeros, basically for the Western Met.

The change here then is they have multiple other services from Asia to Europe that will now cease calling 10 years. So I see this as yet another step towards beginning to adjust the networks toward a new normal where the sewers route is being used. Because keep in mind, these other services, the past few years, have added transshipment calls, especially in 10 years at Jazeeros, to compensate for the fact that you go around Africa and how are you then going to service the Mediterranean?

As the routing becomes normalized, it makes sense that some of these other services, one of them is a China North Europe service, it will no longer now call 10 years, which of course would either make for more buffer in the sailing schedules or make for slightly faster transit times. So, all in all, another step towards normalization, this case from Gemini.

Okay, so upon the on the face of it, good news for shippers, normalization, potentially times, more buffer in the schedule to allow for congestion and disruption as well. Let's have a little bit of good news. Of course, we talked last week and the week before, I think, about the risk here is still very high.

But as long as we keep seeing an all elevation of these services, it feels like we're moving back towards business as usual.

Yes, indeed. And you could say to tag on to the good news that follows from this, to the degree that this is three other services that used to call 10 years that don't have to call 10 years now. And to the degree tent years is congested and is one of many reasons for potential delays, they should actually also vote wealth or reliability on those services no longer calling 10 years.

Absolutely.

Okay. We also wanted to talk about the supply side of the market. There were some announcements last week around order books. And we've seen lots and lots of new building announcements over the last month or so. So what was the latest?

Yeah, the latest is now it's so Hyundai Merchant Marine that have ordered another batch, or another batch of new vessels, basically 12 vessels. Eight of them are 13,000 TEU, and the remaining four are beta-sized. The interesting part, and that also puts into perspective just how large the order books are.

This means that Hyundai's order book is now 32% of their existing fleet. But that's actually not a large order book. They still have the third smallest order book amongst the 16 largest carriers in the world, which, when you think about it, is pretty wild. So a 32% order book still means you are way behind an order book compared to basically all of your competitors.

And to me, it's another illustration that this is going to set the competitive tone for quite a number of years to come, at least for the next three to four years to come. Well, all of the major carriers, all 16 of them, they are being forced down a path where they will have to go out and try to grow their volumes to fill this slew of new vessels that are actually coming.

I know there will be some argues and say they don't have to fill the vessels because they can basically say we get new vessels. It's fleet renewal. And sometimes that is used as almost waving a magic wand. I have seen carriers in the past do it. Say we will not contribute to overcapacity because this is fleet renewal.

If we get 200,000 TU of new ships, we are going to get rid of 200,000 old ones. Yeah, that's fine from a carrier perspective, but the old ones don't disappear from the market. They either go back into the charter market or they get sold on the secondhand market. So, yes, all of these carriers, they will be fighting quite a fight to make sure that they are the ones that can fill all these new ships.

I'm not going to say anything negative about the new ships. They are all state-of-the-art ships, much more fuel efficient, absolutely great ships, but it doesn't mean that all the old ships will disappear.

Absolutely. We'll have to see. It's going to take a while to be festival could be delivered, obviously, but we'll have to keep an eye on what the rate of scrapping is as well to see how many how much of your own talent is actually leaving the market, you say, and where are these other vessels that would have just redeployed and therefore still competing in the market.

And I think it's it's easy to say when you're signing a deal for these new buildings that you're not going to compete on capacity and contribute to overcapacity and push the market down. But when they're actually delivered in the heat of battle, when there's more capacity in the market, sometimes those competitive drivers kind of overwhelm that intention, don't they?

They do.

And again, if we look at past market downturns over the last 20, 30 years, the pattern is the same. If you then do get a market downturn and overcapacity, you do end up with a lot of non-operating owners having vessels. And what they will do is they will keep lowering the charter rates. And eventually, if not one of the big ones, then new opportunistic companies will snap these ones up and start new services.

That happens every single time. That is exactly how a competitive market works. If there's money to be made and if you can get the capacity sufficiently cheaply, somebody will come in and start those services.

Yeah, absolutely. And we talked about it over the last few weeks. Very interesting picture on how the carriers are going to reposition themselves for this slew of new tonnage that's coming in. And I think you used a phrase about consolidation, but more competition a couple of weeks ago on the big line funding to run independent network for.

I think it's going to be fascinating to see how this plays out over the next few years. Okay. Tariff, you said we wanted to talk about tariffs. This is a word that we possibly all thought we'd forgotten about for a period of time. What's new on the tariff frame?

The tariffs keep popping up. I I think everybody that listens to this podcast probably have picked up on what transpired a few days ago. We had the US pass legislation a month ago. Sometimes the headlines are a bit misleading. They are saying it should be 500% tariffs, 100% terrorists. Basically, as far as I understand it, the legislation allowed for tariffs up to those levels.

And basically, this was a sanctions package against Russia, where you could place tariffs on 500% on Russian cargo, which wouldn't really mean anything for shipping because there's not that much containerized cargo moving from Russia to the US, anyhow. From a container shipping perspective, the one that was really interesting was the potential of putting 100% tariffs on the five largest countries buying energy from Russia.

That would include, for example, China or Turkey, or the EU, if you see EU as one entity. And of course, the specter of getting slapped suddenly with 100% tariffs would be, let's call it interesting to put it mildly. As the U.S. tariff policy has evolved over the last more than a year and a half, it tends to change very rapidly.

And now, as I think everybody has seen these sanctions, Russia has now been exempt from these sanctions. So they didn't come into effect, at least not for now. The only thing this has done for container shipping is just keep the uncertainty level high. We are at a point now where this exemption might continue, this exemption might end tomorrow.

We might get 100% tariffs on Turkey. We might not. We simply don't know. So this just fuels the uncertainty around tariff policy that we have now basically been forced to adapt to over the last 18 months.

Yeah, and most has been sadly at the beginning of this administration and when the tariffs came in, something that was very difficult for everyone to cope with. It has become, as you say, the the kind of new normal, right? That we have to watch this and prepare for things to change extremely quickly, with really no warning whatsoever for.

New tariffs coming in from all sorts of different origin areas into the US.

Yeah. And you can say the trade war involves not just tariffs, but there are also other tools in the US toolbox. And this is another one that popped up over the past week. If you think back in the early parts of the Israel-Gaza conflict, the Spanish government banned US flagships from calling Spanish ports if they had cargo for the Israeli military.

If you again think back, one of the practical repercussions at the time were there was a few, for example, Mersk vessels that were US flagged that were barred from calling El Zeros and had to do calls in tent years instead. That launched into an investigation at the Federal Maritime Commission to examine whether this basically was detrimental to U.S.

foreign trade. As with some of these investigations, you can already guess what the conclusion was going to be, but clearly you have to go through the motions apparently of making the report. That report now came out, and yes, it concluded that there was detrimental impact on U.S. foreign trade by the Spanish actions.

So the FMC has not decided a course of action yet, but they have recommended one. What the FMC has recommended is two things. They are proposing a $200,000 fee on Spanish flagged vessels going into U.S. ports. From strictly from a container shipping perspective, this doesn't matter because there are no Spanish flagged container ships.

So if you are narrowly looking at container shipping, fine, that doesn't change anything at all. But they also suggest restrictions on various goods. So import restrictions, and what they are mentioning would be perfumery, cosmetics, oils, ceramics, articles of stone, sugar, and confectioneries. Now, as I mentioned, these are recommendations from the Federal Maritime Commission.

They have put that up on their website. There is a 60-day hearing period. Now, if you are an importer into the US and you like this, that's fine. Do nothing. If you're an importer into the US and you would find this to be detrimental, that's your cue. Go provide input to the hearing. That's how these things work.

But then keep your eyes peeled on a date, roughly 60 days into the future, and that's where we will then likely see tangible action being taken, whether that is then in the form of fees on Spanish flag vessels or actual import restrictions on some of the goods coming from Spain.

Okay, so something else to watch and wait for, or as you say, that's going to detrimentally affect you and your voice into the process. A little bit more, a little bit more uncertainty to have there if you're particularly affected on that read. Okay, and then I think there was a final topic for today, something a little bit less common on the podcast to talk about on the cyber side of things.

What was it about?

Yeah, I think the cyber threat is here. It's been here for 10, 15, 20 years. So it flies under the radar, so to speak, because it's a constant and permanent threat. But sometimes it's good to illustrate the nature of the threat. There was a report coming out here in the past week. There are many different cyber companies out there.

This is one called SOC Radar. But what they did was they simply issued a warning. And this goes to illustrate how some of these business models for the hackers change. Now, mind you, SOC Radar is not a hacker group. They are simply a group providing intelligence about this. The hacker group they're warning about is a group called None, not spelt with an O, but with a zero.

These guys have weird names. And basically the business model, this group, None, is they will claim to penetrate a large number of organizations. This time it's 34 maritime organizations. They will claim to be in possession of critical and sensitive data. And unless you pay a ransom before a certain date, they will release that data into the wild.

The ransom they were asking for here for these 34 companies ranged between 2.4 and 14 billion dollars. To give examples, some of the companies mentioned here would be Eurogates terminal in 10 years, it would be multiple of the terminals out in Business, ONE was on the list, CU lines were on the list.

There were quite a few companies on the list. Now, it has not been verified from any of these companies whether they have actually been compromised, data has been stolen or not. That's important to note. SOC radar notes that this group None has made one similar outburst a couple of months ago. And in that one, one of the companies actually did see data getting leaked.

And another one engaged into a negotiation because this is another interesting, let's call it, feature in the new world of cybercrime. Because the group none that claims to have stolen these data will basically put up a deadline. In this case, deadline was yesterday, October 18th. And you can either pay the ransom or you can do a 10% down payment on the ransom.

That will give you access to a small chat room where you can then negotiate over your ransom. And for the batch two months ago, it was at least known that one of the companies being targeted had done the down payment and was in negotiations. So this is all threats, of course, from a hacker group. The problem is you better be extremely sure on your side whether you have lost data or not.

Yeah, and what it is, but the median is no and just how sensitive that actually is, right?

Exactly. And you can say that is more speculation on my part. And keep in mind, at least up until 2020, I used to have a cyber company in the maritime sector as well. The fact that this group comes out and now specifically targeting 34 companies in the maritime sector, at least to me, sounds like they have not gone specifically after these 34 maritime companies.

They are spread across some shipping lines, port authorities, terminals. It sounds to me like they have gone after some subsupplier of whatever app or IT tool that is widely used in the maritime sector. And that's probably why all these targets are then in the same industry sector.

Okay, that's interesting. Yeah. And say not a brand new thing in shipping these days, but relatively new in a broader scale of things and nothing for people to be aware of and look out for. Okay. That I think covers all the the news for this week that we want to talk about. Mars, you personally, where are you off to you next in your uh in your journey down the uh down the west coast of Africa?

My my next step is a small deviation. I'll be going to Burkina Faso if all goes well. And my van will not be accompanying me over there. That would be a fly-in-fly out. Burkina Faso is sadly one of the few countries on my journey where the security situation does not allow me for to driving in. That is simple that would be irresponsible and reckless.

So Sally will be parked in a secure parking lot whilst I go off to explore Burkina Faso.

Okay, fantastic. And yeah, we'll talk about it most weeks. But I've been keeping up with your journeys as you lead an update. I'm sure everyone else has a role some fascinating adventures as you go around Africa. Yeah, but that's it for this week. Thank you very much, Lars. I hope everyone has enjoyed listening.

We'll be back next week, as always, with everything that's moving the market. But until then, goodbye and have a great week. Everyone, bye-bye.

Thanks for listening to the Supply Chain Secrets Podcast, presented by Night Tech. Be sure to subscribe on your favorite podcast at

Spreads Narrow, Northeast Asia Swings, Hormuz Heats Up

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