West Coast Rates Entangle East Coast: What That Signal Means

Speaker A: You're now listening to the Supply Chain Secrets podcast, the ultimate insider's guide for all things ocean shipping, brought to you by nice shacks, helping you deliver through volatility.

Speaker B: Hello, everyone. You're listening to the Supply Chain Secrets podcast. I'm your co host, Caroline Weaver, and with me is Lars Jensen. Lars, how's it going?

Speaker C: It's going great. As you can see, I'm in my home office today, which is likely going to be the last time in a year and a half. You're going to see this background. Tomorrow morning, I'm, um, moving up the timetable. The Synchro Sally voyage to Africa kicks off then.

Speaker B: That's a long time to be away from home. Do you ever get homesick?

Speaker C: Usually I don't. And I'm cheating. I'm going home for a short Christmas vacation as well as a small summer vacation in 27.

Speaker B: All right, gotcha. Cool. We look forward to hearing about all of the adventures on the trip. Hopefully it starts off without a hitch. So let's go ahead and get started. So I'll pull up the NIFI and let's get a read on where we're at with rates.

Speaker C: That's actually the sub indices on the Trans Pacific. And there are two things that are important to take away from this. One is glaringly obvious that rates continue to skyrocket rapidly. That follows in what we've seen in recent weeks seems very much to be fueled by a lot of US Importers that basically try to get through the door at the same time. They all wanted to pull forward cargo, they wanted to move, and now they're tripping over each other. Easy to be the Monday morning quarterback on that. Of course, I'm sure all of them are reckoning they were ahead of the curve. Turns out they weren't. But there's another thing that's also very illustrative here because when we look at it, it is obvious that there's a huge gap between the US west coast and US east coast rates. There usually are. But when you look at the last few weeks, that gets a lot more muddy. Basically, you get some of these lines almost entangled. So where you usually have a significant pricing gap between the east coast and the west coast, you are now at a point here where especially Southeast Asia to US west coast is basically getting up to US east coast rates. This might sound odd because clearly US east coast, it's a much longer route. You have to go through the Panama Canal or have to go all the way around Africa, but that just shows the extremely Unsettled nature of the market. Now, what we're looking at here are, uh, the rates over the last 12 months. I didn't want to pollute the picture by taking too much in. I did the analysis beforehand. Fine. Does it ever happen that some of these west coast rates, so to speak, get entangled with the US east coast rates and actually it does. It happened twice last year. It happened right around when the US Trade war started. And it happened also right around when you then had this massive spike in summer last year. Remember when we had 100 plus percent tariffs on China, they were pulled back. So it appears every time you have a major upheaval in the US import market. And it is at a point where a lot of US importers suddenly want to import a lot of product rapidly, then we see this pattern unfold. And logically it makes sense. If you're a US Importer and you want to fast track some of your supply chain, you would tend to favor a U.S. west coast routing to the degree it makes sense, because it is the shorter one, rather than sail all the way to the US east coast, which at the end of the day skews demand pressure towards the west coast, pushing up spot rates in exactly that market. That is also the pattern we see unfolding right now. Now what you can also see, if this is the case, you would likely also expect the market to be somewhat unsettled. And we actually do. You can see it in this graph. But if you go in and subscribe up to the data, you can easily pick it up yourself. We've been talking about it before that you can see the spread in the market. What's the spread between what are the 10% highest payers versus the 10% lowest payers actually paying? And if we look at the market right now, there's actually a spread on US West Coast. So between the 10% and the 90% of as much as 1900 dollars and $1800 on the US East coast, this is a phenomenally large spread. And again, historically also indicates it is an exceedingly unsettled and unstable market we're seeing in the Pacific. So the question is, what does that also bode for the future? So if we're looking here at the, uh, futures rates, the current plastic future on the Asia US west coast, we can see this massive spike in current spot rates that we talked about. But as I also mentioned, this is very unsettled. We can see it in the spread. We see it in this entanglement between west coast and east coast rates. If the reading is true that this is because fast forward of a lot of cargo, that would also lead to the conclusion the peak should end rather rapidly. That's also what the futures market is expecting. Yeah, because if you look at the futures market here, this is clearly a market in backwardation. The current spot rate is substantially above where we see the futures rate for July. July is right around the corner. We right now have spot rates at around 5200 and the average for July is all the way down to 3,600. That's a $1,600 drop, mind you. Of course it might be that all the futures market participants are wrong. You can never know that for sure. But it is a very clear indication that all active participants in this market do expect this wild ride to be over relatively soon. And relatively soon would be within one or two weeks if this is actually to hold up.

Speaker B: Yeah.

Speaker C: So to sum it up, we have a Pacific market where it appears we got a lot of forward movement by importers that want cargo to move, they want it to move fast. They tend to prioritize the west coast. But that means the party is going to be over very soon as well. That of course raises the question, what about the other main east west trade, Asia to North Europe, whether we see that same thing unfold. But if we look at it here, we absolutely do not. On, um, this one, yes, we certainly also have sharply increasing spot rates. We've had that for weeks, as we've also discussed multiple times here on the podcast. That is driven by solid demand. Also an early start to the peak season. But the spread, if we start to look underneath that, is not of the same magnitude as we see in the Pacific. And furthermore the market remains in contango, which means that the futures rate that we're looking at for July is still higher than the current rate. Right now we are about 4,100. And for July, if you move it slightly to the right. So there we are but 4300. It's not a much of a gap. So we should appear in the apex of the Asian North Europe market, but it is still a few hundred dollars above us compared to where we are now. So a very different market dynamic now unfolding. Asia, North Europe being fundamentally strong, seemingly strong for a while to come, whereas Pacific seems to be a relatively short lived affair due to come rapidly down again within a matter of weeks, at least with the current developments that we're seeing in the market.

Speaker B: Awesome. Great stuff, Lars. Let's talk about the Strait of Hormuz. Because we've had a lot of drama happening, so to speak, what's been going on there?

Speaker C: Yeah, drama is the right word. When we last spoke a week ago, basically we were at a point where there was the deal to make a deal between Iran and the us. The strait was declared open. Yes, there was a mine risk, so you couldn't go anywhere. You just want it. We had a period during mid late last week where quite a number of vessels made it out. Also a few dozen container vessels by the look of it. And then everything came crashing down. Then Iran attacked two different ships, one of them 8,500 TEU, everlovely operated by Evergreen. Now why did this happen? The perspective of Iran is that the mou, so the deal to make a deal between Iran and U.S. according to the MOU, it is Iran that decides which transit route you're allowed to use. What happened last week was that then the US and actually also a few other countries went out and designated a new southern corridor that's a bit wider than the one that has been close to Oman to make it safer to transit, allow more traffic to pass through. And Iran clearly saw that. Iran's perspective is that's US violating the mou. So Iran said fine. Then they were shooting at two of the ships, a tanker and a container ship. The US didn't take too well to that. So they believed that this was a violation of the MoU. So they did a bombing raid on Iran. Iran then fired missiles at Bahrain. US then shot at Iran. Iran then shot at Bahrain and Kuwait, where we are now as of Monday. It seems the tit for tat for now have quieted it down. It's been more than 24 hours since they were exchanging missiles and drones. But all in all, this means the situation is extremely shaky. I think we spoke about that last week as well. Most of the traffic is outbound. We also spoke about last week that it's noteworthy the language from the International Maritime Organization was that we were seeing evacuation of ships. M and what happened over the weekend shows why that is an accurate language. Shipping lines mainly moving ships out of the region. They're not really willing to move them in because what if they get stuck? Again, for anyone involved in container shipping, that means it's the land based alternatives that's going to prevail for quite a while longer.

Speaker B: Yeah, it definitely seems like a fragile situation overall.

Speaker C: Absolutely. Uh, and again, it's fragile because there is clearly still a difference of opinion between Iran and the US in terms of what the MoU means. And Iran has clearly demonstrated that if their interpretation is not heeded, they will shoot at chips. It's as simple as that.

Speaker B: I think maybe one of slightly positive views of this is because these events are happening so quickly. We had this MoU, but it didn't last. People aren't making these longer term decisions because all these events are happening so rapidly. So I guess that's one of the good things is you're not making substantial changes that are going to impact you more heavily. Since it seems like everyone's just waiting, wait and see thing.

Speaker C: It is a waiting game. And we shouldn't also forget that there will be hundreds of thousands of containers filled with cargo around the world that has been ready to go for months, just awaiting, uh, the Hormuz to open. So at some point when Hormuz reopens, we should also be prepared for then there will be a surge of demand being funneled into the Gulf, which will likely then create congestion problems in even these well functioning Middle Eastern ports.

Speaker B: Yeah, that's for later in life. We'll worry about that one. Let's shift gears a little bit away from the Hormuz crisis. Let's talk about tariffs because it's back on the platter today. So what's happening there?

Speaker C: Yeah, if you remember last year when we did the podcast, there was something new every single week. Something changed. Fortunately, that is no longer the situation. And I think everybody's happy with that. That doesn't mean the situation is stable. First of all, let's keep in mind these section 122 tariffs, those are the ones that the US implemented when the IEBA tariffs were ruled illegal. So section 122 was announced, but by law they can only stay in effect for 150 days. So that means on July 24th they expire. And, um, for now, there is zero clarity in what's going to replace them. We have had some Section 301 investigations that might be used, but what level of tariffs against whom is unclear. And then a few days ago we had Trump being out on social Media now threatening 100% tariffs on countries that implement digital service tax. For those who may not be familiar with the term, that's especially a thing over in Europe where France, Spain and I believe Italy has been some of the front movers on this, where they say there is a lot of digital services companies that could be, say Netflix, it could be Google, it could be others, where if you provide digital services into that country but you pay no tax because your corporate headquarters and where the money Goes is outside of Europe. They simply introduce digital service taxes to retain some of those tax payments in their own countries. France right now already has a 3% digital service tax, for example. But Trump was then out basically tweeting that there will be 100% implemented forthwith if any countries do that. It has not been implemented forthwith. I think we're all familiar with this type of social media. Sometimes he will say things that doesn't happen, sometimes he will say things that do happen. So for now, it is a new threat out there. Potential 100% tariff on, uh, especially some of the European countries at any point in time. So more uncertainty into the tariff game.

Speaker B: This sounds familiar. Didn't he bring this up before too? Did anything happen when he threatened it before?

Speaker C: No, because then we ended up with a trade deal between EU and the US in this newest tweet, it was matter of, okay, it will be 100% and, uh, trade deals are off.

Speaker B: Okay, so that would essentially be any product coming from. In the example of France, since they already have a digital tax, as per the tweet.

Speaker C: Yes, it will be on everything.

Speaker B: That's. That would be crazy. That'd be a very difficult thing to implement.

Speaker C: I would imagine it would be. We have seen worse over the last, what now, 14, 15 months? So I wouldn't say there's a high likelihood of this happening, but it's also a non zero likelihood.

Speaker B: Yeah. All right, we'll keep an eye on that there. Um, you mentioned before some of the ports in the Middle east that are absorbing some of the volume that previously has gone into one of the ports that are now affected by the Strait of Hormuz crisis. So Khorfakan, Fujairah. Ah. Can you talk about the impact that we've seen on these ports?

Speaker C: Yes, you have at the United Nations Conference on Trade and Development, they produce a regular data set where they measure the connectivity of ports, all ports in the world. It's an index, so don't place too much credence in the actual numbers. But what you can see is how that changes. And what you can see for the newest report that covers second quarter, which of course is then fully embraced with the almost closure, you can see very sharp declines in connectivity, obviously ports inside the Gulf. So ports like Jebel Ali, Dammam Ahmad up in Qatar, they have a significant drop, not to zero. It's not to zero because you still have services, for example, from Jebel Ali, then going up to Qatar and up to Iraq and up to Bahrain to have intra golf services. But they have dropped very sharply. But you can also see in that data set, uh, how connectivity to some of these overflow ports, especially like Kofakan and like Fujairah, which is on the south facing out towards the Gulf of Oman, have increased rapidly with all the overflow services now going there. You also see an increase over in Jeddah over on the Red Sea side. The one thing that's that could be surprising, but it isn't when you think it through the port of Sharjah, it's located inside the Persian Gulf. M But unlike the other ports in there, Sharjah has seen an increase in connectivity. And the reason is actually some of these overflow new alternative services. You would have cargo shipped in to a port like say Khorfakan, facing the Gulf of Oman. It would then be trucked over the tiny peninsula of the United Arab Emirates to the port of Sharjah inside the Persian Gulf, then loaded up to ships there for onward transportation to, for example, Iraq or Kuwait. So that's a port that has locally benefited and has gotten more business and more connectivity despite the challenges in the region.

Speaker B: That's interesting. Cool stuff. I think it might be good also to just define what port connectivity is. We maybe should have started with that, but never too late to put it shortly.

Speaker C: Port connectivity is a measure they've been doing for almost 20 years now and basically looks at every port. Then to maybe summarize at a bit too high level, how many regular services per week does a port see? How many ports around the world is it connected directly to? What is the magnitude of the vessels that coming to that port? How many different line of shipping companies operate services to that port?

Speaker A: How many?

Speaker C: So it's an amalgamation of all these different entities that are then being put into an index, which usually is a pretty good way of measuring how well connected you are to the rest of the world, at least by direct services.

Speaker B: Cool. Yeah, it's interesting. Definitely a cool metric to see change over time with trade always influx.

Speaker C: Yes.

Speaker B: All right, last topic for today. We're going to talk about containers lost at sea. So tell me a little bit about what you saw there. Yeah.

Speaker C: Ah, the World Shipping Council comes out with a report once a year where they are tallying up how many containers were actually lost at sea. And this is going to be one of those glass half full, glass half empty kind of perspectives because you can look at and say there was 1478. So let's call it around 1500 containers that were lost at sea. Now, 1500 containers, given each Container is the size of a bus. That is a lot of containers to see on your inner imagination floating around at sea. On the other hand, there were 280 million containers transported last year. Now, mind you, that number also includes the transportation of empties. Empty containers can fall overboard as well as full containers can. So 1500 containers overboard sounds like a lot, and it is a lot of containers. But out of 280 million, that's a relatively low failure rate. In their report, they put it at 0.0005%. If any of our listeners are the same as I am, 0.005% is not really a number I'm, um, getting a good intuitive grasp of. It's just a small number. So to illustrate how small a number that is, assume sake of argument that you want to get in your car and you want to drive from Times Square in New York, straight across the US all the way over to Los Angeles. So you start, and now you drive 0.0005% of the journey. How far have you actually come? Turns out, not very far at all. You are still in Times square. Okay, so 0.005% of that whole journey means that you haven't even crossed Times Square yet. So that's why I say it's the glass half full, glass half empty in itself. It is definitely not good to lose 1500 containers in the ocean, especially not if some of them has got, for example, various types of hazardous cargo on board. On the other hand, out of 280 million, this is an incredibly low failure rate. And if you look closer into the numbers, you will find that almost half of these stems from a single incident. That's the sinking of the MSC Elsa. Because when a vessel sinks, obviously all the containers are then also registered as lost into the sea. So if you say that's a separate event, it's even half of this. So I would leave it for people, for themselves, to make up their mind whether these 1500 containers are a lot or a little. My perspective is if you look at failure rates and also failure rates and all the other aspects of life, this is actually an exceedingly low failure rate.

Speaker B: Yeah. If you were on the MSC Elsa and your containers sunk, you might feel like it's a big number. I was impacted. All right, Cool stuff. Thanks for enlightening us there, Lars. Anything else you want to add to today? Today's episode?

Speaker C: No, I think that does it. Well, then we will see next week where I am at when we do the first podcast while I'm on the Voyage.

Speaker B: I know we're all looking forward to it. Safe travels. Obviously, we'll be checking in every week so we'll hear where you're at, what happened, what's been going on. So everyone stay tuned for that. But other than that, I think that's it for today. If you haven't already subscribed, we're on Apple music, Spotify and YouTube. We. We also have a weekly newsletter that we are sending out after each episode is released. So if you don't wanna listen to the whole episode, don't have time to. You can receive a summary with all of the screenshots of graphs as well to your email address. You can sign up for that on our LinkedIn page.

Speaker C: And just a final comment from me in case anybody is wondering. Yes, there is a website called synchrosally voyage.com and it's also on Instagram as Synchrosally Voyage.

Speaker B: All right, you've got just gained a new follower from me and probably many others. All right, everyone, have a great week and we'll talk to you all next week. Bye, everyone.

Speaker A: Thanks for listening to the Supply Chain Secrets podcast presented by Nice Shacks. Uh, be sure to subscribe on your favorite podcast. Apparently.