March is the traditional low season for the global logistics industry after the Christmas shopping period passes and Lunar New Year shutdowns in January and February result in fewer goods coming out of factories in Asia. It is also the time when ship operators, importers and freight forwarders sit down to discuss long-term contracts.
At the best of times this is an intricate dance between multiple stakeholders with billions of dollars in revenue, inventory and infrastructure on the line. Negotiating these deals is a massive exercise in game theory. Each party is trying to assess their own needs while guessing what their counterpart has to offer.
This year, the process could be even more complex than at the height of the COVID-19 pandemic when demand soared and logistics got snarled by shutdowns. We could think of the swing factors affecting shipping supply and demand as divided into anticipated and unanticipated variables. In the first category there are risks that the industry has always known exist, even if their timing or severity cannot be well forecast: inclement weather, crop yields, fluctuating oil prices and recessions. The unknown unknowns include war, pandemics, embargoes and sudden financial crises.
The years 2020 and 2021 in particular were tough. No one saw the pandemic coming, and we certainly did not know how long it would last. Yet, it was one massive variable that could be easily tracked as governments opened and shut borders, while trade data — including forward-looking export orders — gave some clarity to a murky situation.
Right now, the standard variables such as a possible recovery in global economies and resultant trade flows are not particularly clear. Even central banks are not quite sure which way the wind is blowing. More tricky, though, are two major wars that have no clear path to peace and whose impacts are spreading beyond the battleground. Russia’s invasion of Ukraine is into its third year, so shipping companies already know which sea lanes to avoid and how trade flows have changed.
The Israel-Hamas war, however, has spilled out into the Red Sea as Houthi rebels, supported by Iran, create terror and uncertainty for one of the world’s busiest shipping routes. There is no way to predict when the attacks, which began in November last year and include missiles targeted at vessels in the waters near the Suez Canal, might end.
There is a workaround. Marine traffic could skip the narrow channel that connects Asia to Europe and take the long way via southern Africa. However, this route adds many days and millions of dollars to the trip. It also effectively reduces supply because it delays a ship’s ability to unload cargo and commence the next trip. Then we have the lingering drought in Panama which has impacted maritime flows on the other side of the globe.
If you are a company that buys thousands of containers of cargo per year, knowing when these crises will end is a crucial part of deciding how much long-term capacity to lock in now versus what amount should be bought at prevailing rates when needed. The wrong bet could cost billions of dollars in overpriced shipping fees, or perhaps worse, lack of availability when tonnes of fresh mangoes, electric vehicles or factory equipment need to be delivered on time, but are instead left sitting on the docks.
The game theory comes in when a buyer not only needs to assess its own needs, but work out whether shippers might have excess capacity in the future — because no one else locked it up in long-term deals — or could be short of slots because others made an early bet. The impacts on consumers range between shortages and stubbornly high inflation, or a glut and price cuts.
There is already confusing signals flashing this negotiating season. Global trade is at a relatively normal level compared with the frenzied days of the pandemic, yet shipping rates remain high. The Drewry World Container Index, a broad measure of the spot rate to move a 40-foot container across eight major routes, was at US$3,287 on March 7. That is 82 percent more than a year earlier and 131 percent higher than the average for 2019. Yet Drewry Shipping Consultants, which compiles the data, forecasts spot rates are to decline in the coming weeks.
A continued drop might embolden buyers to push for lower rates, or hold off on booking long-term capacity. Yet perception could be as important as reality.
In this regard, the data points to bullishness. Hamburg-based xChange Solutions, which tracks container-price sentiment through its xCSPI Index, says that while prices have dropped, the measure of the market’s mood hit an all-time high in February. It is still in positive territory and much higher than a year ago, indicating “supply chain professionals remain positive about the container price hikes further into the month of March owing to the persistent Red Sea situation and its implications on supply chains,” xChange said on March 5.
This year’s matchup between buyers and sellers offers players a choice: follow the hard data on consumer demand and economic recovery, or lean into sentiment and gut feeling. Either way, big bets are to be placed and we are all to wear the consequences.
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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