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A new normal for ocean freight comes with fresh challenges

Geopolitics is not the only risk to ocean supply chains in the ‘new normal’.
Geopolitics is not the only risk to ocean supply chains in the ‘new normal’.
15 November 2023 •

The need for supply chain resilience is fueling the belief among retailers and manufacturers (including Chinese companies) that they must diversify risk by developing omni-sourcing strategies.

However, risk comes in many shapes and sizes. While the ongoing conflicts in the Middle East and Ukraine, or U.S. tariffs on Chinese imports, are not disrupting supply chains in the same way the pandemic did, they do affect global trade flows to some extent. The idea that supply chain black swan events ended with the cessation of pandemic lockdowns has also been debunked.

Moreover, the increasing attractiveness of populism and protectionism is also adding complexity to the long-term view on what the future logistics landscape will look like.

"The general consensus for shippers is to take a cautious approach in the months to come,” said Niki Frank, CEO, DHL Global Forwarding Asia Pacific. “While capacity has returned to a healthy level, there is still a need to strike a balance with inventory and demand in the current economic state.”

Understanding the challenges on the trans-Pacific trade

Setting geopolitical risks aside, it is more prudent to look at the current situation on the critical trans-Pacific route. Until recently, Panama Canal transit limitations due to El Nino-driven drought and low water levels in the region were not too disruptive as container traffic is viewed as a priority.

The situation, however, worsened in October, when the canal was at its driest. Given that each transit consumes a large amount of water, irrespective of ship size, this meant the Panama Canal Authority (ACP) was forced to limit transits and reduce draft size.

Liners transiting the Canal from Asia to the U.S. East and Gulf coast ports are sailing with less cargo, or offloading boxes and railing them across the isthmus for pick up on the Atlantic side. In addition, the number of Neopanamax transit reservation slots will be cut in half, from 10 to five as of 1 January 2024.

El Nino’s impact is also being felt elsewhere, such as the Amazon River where low water levels have resulted in a lack of access to some ports, diverted traffic and low water surcharges. The El Nino draught is expected to last into 2024. This could see more vessels transiting the Suez Canal instead of the Panama Canal, adding an extra 1,800 nautical miles on the Shanghai-New York lane.

Although this has some collateral benefit for carriers in a rates downcycle because it absorbs capacity, the Suez Canal is not cheap, and it is getting more expensive. The Suez Canal Authority (SCA) has announced that it will increase fees by 15 percent on northbound transits from 15 January 2024, putting more pressure on carrier bottom lines.

According to the Hong Kong Trade Development Council, current fees vary between US$400,000 and US$700,000 per transit depending on the size of the ship. This means carriers are looking at a cost increase of US$60,000-US$105,000 per voyage.

Another emerging supply chain risk for trans-Pacific ocean supply chains is the possibility of more dockworker union action. While this year has finally seen the settlement of negotiations between port interests and unions on the U.S. West Coast, the focus of industrial action is now turning to the U.S. East and Gulf coasts.

The International Longshoremen’s Association (ILA) — the union representing 45,000 East and Gulf Coast dockworkers – warned recently of the possibility of a coastwide strike in October 2024. Negotiations will likely drag on through 2024, with unions in a strong position.

Emission reduction in EU poses new challenge for shippers

Meanwhile, the November DHL Ocean Freight Update highlighted that the European Union’s Emission Trading System (ETS) will come into effect for the shipping sector on 1 January 2024.

A key issue with the ETS is how surcharges will be calculated. Unlike the bunker adjustment factor, which is calculated based on the fuel price at the end of the year, the ETS is based on how much European Emission Allowance a carrier has for every tonne of CO2 emitted within a calendar year. Companies that produce more carbon emissions than the allowance would incur a fine. This begs the question of how these costs, which are still undetermined for now, will be passed on to customers by carriers.

“Even though the ETS is an EU-only regulation, there are cost implications for the entire shipping industry,” said Frank. “While anything that reduces emissions is a positive, we are still waiting for more clarity on how these charges will impact shipment from Asia Pacific to Europe.”

What is clear is that in this new normal, ocean supply chain risk will likely remain high, and not entirely due to geopolitical issues.