Episode Transcript
[00:00:02] Speaker A: Hello, I'm Mike King and you're listening to an extended clip from episode 31 of the Freight Buyers Club. In it, I'm talking to Philip Damas who is the managing director of Drury Shipping Consultants and head of its supply chain advisors practice. And we're covering container shipping markets, the outlook for 2025 and beyond, and everything you need to know about the latest for ocean freight contracting and tendering. If you're checking this out on YouTube, you'll also be able to see on the video the slides that Philip refere. Big thanks to Democo Express Group for supporting independent journalism. Enjoy. As trailed I'd like to now welcome to the Freight Buyers Club Philip Damas, who is the managing director of Drury Shipping Consultants and head of its supply chain advisors practice. Hello Philip. Welcome back.
[00:00:50] Speaker B: Thanks for having me here.
[00:00:51] Speaker A: You're always welcome. And just a note to all of you listening. Philip will be referencing some exclusive Drury charts and graphs during this interview and you'll be able to see them if you watch on the Freight Buyers Club YouTube channel. But hopefully we can make sense of all this in audio only too. So let's see how we get on with this. Okay, so Philip, there is certainly a lot to consider from the shipper side there from Alan McTaggart at TTI, a rare opportunity to hear in depth how a major global shipper approaches the world of supply chain and container shipping. One of the things we touched upon was the contracting seasons on the Asia, Europe and Trans Pacific container trades. On the former, I was speaking to Daniel Cacciotti, global head of Ocean Phrases Scan global logistics on my most recent Lodestar podcast and he said that the Asia Europe contracting season has been a little unusual this year. Tech companies have tended to sign up before the turn of the year, but many others are holding on through the first quarter. What is Drury finding? Because we now have this. This new question mark about where rates might go if the Suez Canal opens up if this peace deal holds between Hamas and Israel and the Houthis stop bombing shipping in the Red Sea. That's a big question mark on possible spot rates down the road if this does happen, isn't it?
[00:02:12] Speaker B: It is, yeah. So as you mentioned, we're seeing for the work we do administering tenders, but some large European importers have postponed their tenders, so they haven't completed them yet. We're still working on some of them for shippers. And I think because of the Hamas Israel development, there may be companies who will say we should slow this down even further because they have been hoping all along that the situation would improve for shippers. But the Suez Canal would reopen and the rates would fall. But this hasn't happened yet. So we are sort of in a hiatus period. And I have to say, so we do, as you implied, expect spot price to fall particularly. Well, they have already started falling, actually in recent weeks, but they will keep falling during the rest of the year, particularly if the Suez Canal reopens. If this happens, and that's a big if, maybe we'll come back to this. Frankly, there will be a huge overcapacity and a collapse of freight rates, both spot rates and contract rates. But for now, because the Suez Canal has not reopened and we do not expect carriers to rush to resume transit, maybe I could elaborate a bit because it has a big impact.
I used to work for carriers. So if you're a carrier, what you're looking for is confidence that this West Canal will not open when we can close the second week. So they'd be waiting a bit, frankly, to see whether this is a stable situation. They will also want to make sure, and many have said so. But the conditions are safe for their seafarers and a big third precondition, it has to be insurable. So they have to wait for the insurance market to be convinced that they don't have to pay an extra million dollars in insurance costs. So there's quite a number of dominoes which have to fall into place before they go back to the Suez Canal.
[00:04:11] Speaker A: Probably one link there for shippers as well. I mean, a lot of cargo carrier travels on these container ships without insurance. If these ships start going back through the Suez Canal, maybe have a look at your cargo insurance.
[00:04:23] Speaker B: Indeed, yes. And so I did mention the spot rates would fall whether or not the Suez Canal opens. But as I'm going to show in this first slide, so if you're watching on YouTube, so the spot rates are falling, but they are still much, much higher than they were in December 2023, which means it's not yet a buyer's market. On the spot market, from a contract rates viewpoint, the contract rates have fallen in 2024 by about 40% from previously very elevated levels. But as you may see if you're watching this on the chart, the contract rates have been increasing, not decreasing in the last five months. So we are at the situation where, contrary to some shippers hopes the contract rates have not decreased. And we at Drury have two scenarios. One is there was no ILA strike and the Suez Canal was closed, where we think the contract rate will Increase depending on the trade routes by about 10, 20% this year versus last year. So it will still take some time until contract rates follow.
[00:05:39] Speaker A: The ILA strike being the deal that was struck on for the U.S. east and west coast terminals, a master contract for those dock workers there. The ILA union with the USMX was representing port and container shipping interest that that headed off a possible strike on the 15th and that has removed one of those big possible bottlenecks in container shipping. Just going back to the Asia Europe strategy, we heard from Alan how a big shipper like TTI approaches this. Let's say I'm an SME shipper with Asia Europe exposure. I haven't signed anything yet. How would you advise me to progress? How do I go about doing my contracts now? Shall I hold on and see what happens for as long as I can?
[00:06:21] Speaker B: Yeah. So the fear of many shippers is they could sign a one year contract at current rates which are as I mentioned, elevated and be stuck with very high rates for a year. So that's a risk and it would be very difficult to justify to their management six months down the road when the rates have collapsed. So to prevent this, what we are saying is a try to develop relationships with your carriers so that if the market changes you have a strong enough relationship to say look guys, this is a different market. The Suez Canal is operating again. We want to review the clauses, we want to review the rate. So that's a good reasonable way of progressing. It's either this or you have an index link contract where the rates would fall when the market falls, which is a bit difficult to run frankly. They're not very, very popular. And the third option which I think Alan mentioned is you do not commit all your volumes to a contract. So you put say 80% your contract and the other 20% remains in the spot market. So you will benefit from the change in the market incomes split the risk.
[00:07:30] Speaker A: Okay, the other factor, I mean we will come back to this but we've also got the container shipping alliance structures are all realigning in the coming months which is another joker in the pack which affects the Asia Europe. It also affects the Trans Pacific market. Now just a timestamp this. We are speaking 22nd of January.
So let's look at that Trans Pacific market. There's a, there's a bunch of things going on there. Obviously we have this new, with the new Trump president. We're still seeing where that, where that works out. Just briefly, what should shippers be looking to negotiate including contract with carriers and forwards in Q2 when that trans Pacific contract negotiations, negotiations start being opened.
[00:08:10] Speaker B: So first thing to negotiate is space protection, which they didn't get during the pandemic period. Now you can get it. The second thing you should consider, because we still believe at Drury there are still a huge number of risks and a huge level of volatility in both operations and prices. So the question is, if you're a shipper and something happens like the Suez Canal reopening or a new port strike or plenty of canceled sailings, you want to negotiate with your carriers, but they will provide some support to help you at least have some level of stability and predictability in your operations. So that's the second thing that they should get. And also if possible, they should negotiate that Any previous Suez Canal surcharges, if you ship, say from Asia to US east coast via or in Africa, these surcharges should disappear when the Swiss canal reopens.
[00:09:06] Speaker A: There's quite a lot going on in the U.S. how does tariffs change this whole picture now the tariff scenario is changing day by day. Well, it seems like the most firm information we have is that President Trump wants to impose 25% tariffs on Canadian and Mexican imports starting February 1st. The big trade impacts here by volume will be beer, metals, automotive and electronic goods. Last year we saw this big influx of imports from Asia into Mexico. So firstly, will that be affected? And secondly, we seem to be having a bit of the heat taken out of the rhetoric aimed at China and tariffs. Right before the election this was it's going to be 10% for fentanyl, 50% for this, 20% for this. We've already got tariffs on a lot of Chinese exports into the US but now that now there's a 10% figure being bandied around, lots of uncertainty. How do you factor in all of this risk around tariffs?
[00:09:57] Speaker B: Particularly I think to start with the day to day, I would speak between the day to day and the long term. So day to day it's likely that China through Mexico trade, which has been booming in recent years, will be affected. We don't know how much. And also the economics of this will depend on whether there's an alternative source or not. Because when previous sources Trump administration put types against China, you could import from Vietnam instead. So it was a shift in sourcing. If Trump imposes ties on China and Vietnam and Mexico, then it's a completely different proposition and it would require medium term big decisions on relocation of factories, which would take years. So I think it's a bit too early to know whether there will be an impact in the short term, except that we can predict there will be a rush of Cargo just before February 1st to try and move some cargo and avoid the tithes when they come. So that's the first part. Then the medium term is, I think many companies, including some we're working for, are looking at trying to support their sourcing teams because Mexico is in the target aim. Trump China seems to be to a lesser extent. So now many shippers will be looking at what does it mean if I need to move my production to Vietnam, to Cambodia? What are the services, the risk, the availability of containers? So they have to start the planning now because they want to support any shifts in sourcing.
[00:11:37] Speaker A: Just on that US presidency, setting aside tariffs, there's a lot else going on. How are you factoring this into your analysis? I mean, I can throw a few things out there, but I'll let you fire away and maybe I'll come to some of the things maybe you don't get to.
[00:11:53] Speaker B: Yeah. So some of our customers are asking us, what is the impact, for example, of this blacklist against Cusco and cimc, which is the largest producer of containers? And we have to say it's not clear so far. All we particularly for this is that these two companies are on the blacklist, but there is no sanctions. And when there were sanctions imposed on Chinese bulk companies, they were quickly lifted. So we really don't know the medium term impact. In principle it could be very, very disruptive, but in practice, we don't know. It's just one more uncertainty in this whole shipping market.
[00:12:31] Speaker A: I'll just clarify a little bit there on that. So this ruling, I think it was from the Department of Defence, it has been reported elsewhere as a sanction, but it's not actually a sanction, it's more like a name and shame. There's no enforcement to it. But when these things have happened previously, it has led to sanctions later on, but we don't know if it's going to go there yet.
[00:12:51] Speaker B: I agree. And then. So there's quite a number of other things in the US where frankly it's a bit difficult. So far, it looks as if it's not going to be a huge trade war. Again, it's early days in the Trump administration. We thought previously we may have to look at a number of scenarios, some of which would cause a fall in international trade, which has happened for many, many years. Based on the data as of today, it looks as if it's going to be a bit more targeted and less disruptive for carriers and forwarders and shippers. So we stick with the previous forecast. There will be a slow increase in demand this year.
[00:13:29] Speaker A: There's been a lot of talk about the Panama Canal and also Greenland. Right. So the shipping link for Greenland is if ice caps melt further, Greenland becomes more significant. It also is a home to China and Russia are looking at Arctic shipping a lot. It's not that specific to container shipping yet. Greenland also has some rare earth metals and some other resources that might be quite valuable for the U.S. maybe a bigger one for, for container shipping obviously is the Panama Canal and the statements that are coming out from the Trump administration about China being in control of Panama Canal. Now it isn't. But Hong Kong's Hutchinson Ports does have two port locate ports located near the Caribbean and Pacific entrances. That's about as close as you can get. How are you looking at those two things? Is it too early to tell?
[00:14:14] Speaker B: I think it's too early to tell. Yeah.
[00:14:16] Speaker A: Okay. The alliance realignment, how disruptive do you think that will be this year? And what's the possible upside for shippers if promised schedule reliability? I was talking to Alan about this before from the Gemini cooperation between Hapag Lloyd and Maersk. If that bears fruit and we end up with 90% reliability, is that a likely scenario? And what do the other carriers do if they pull that off?
[00:14:40] Speaker B: Yes. So I share Alan McTaggart's skepticism and many of the shippers skepticism about an alliance ability to deliver 90% reliability. It's never been done before. And I know that the 90% target only applies to direct services.
So they internally their target for transshipments, including a shuttle, it's only 80%. So it's not 90% even 80% if they get it. My previous colleagues who work for Maersk in trach input departments said it's a very high risk. Franchipen is just too high risk. Imagine the ILA strike, what it would have done to the 80% or 90% score. It would have completely destroyed it. So we think if they really have to prove that this is doable, we're skeptical. We think there will be several months where there will likely be some bedding in of new processes and everything. And we will not see the 80% or 90%. However, if they pull it off, then that raises huge questions for their competitors because I still see reliability as a differentiating factor. So if they do that then I think all the other carriers will have to think should we follow or do we stick with our current systems?
[00:15:59] Speaker A: I Spoke to Henrik Schilling at Hapag Lloyd on the Lodestar podcast last week. And just to clarify, they're looking at getting this in place by the summer and they're looking at 90% reliability. And that's port to port, not hub to hub. That's how they're defining that. Okay, let's look at demand on a more general level. Philip, what's Drury's latest container shipping demand forecast and what are the major macroeconomic drivers and risks? Apart from all those things we've already covered that you're taking into account, how are you seeing this market moving ahead?
[00:16:31] Speaker B: So to share with you, we our market research department is looking at the various factors which will influence the market this year. And as you implied, there will be a huge increase in supply, again 2 million t of capacity, which is 5%. And that's before you add the effective capacity. If the Suez Canal reopens, demand, we think for various reasons including tariffs will likely rise by just 2%. So there will be an imbalance there. However, there's a number of inflationary market as we see it, like the high spot markets, like higher labor costs, like the ILA cost now would go up. And we see that the carriers nowadays for the last five, six years are more disciplined and are reacting to any overcapacity by canceling sailings idling vessels, which we think will happen this year when the capacity is surplus. And the last point is that with all these things there's quite a number of potential outcomes. So we do not have one central forecast. We have forecast for several scenarios, depending what happens to tariffs, what happens to Suez Canal. And there's a number of over risk around this.
[00:17:49] Speaker A: So just on that supply side. So there's a lot of factors that will determine LINA strategy, lots of new buildings coming in. We don't know what's going on with Suez. There's a lot of other question marks. Should shippers be looking at a lot of maybe ships will be idle if we get this excess capacity when Suez opens, we'll see a lot of idling. We'll also see a lot of blanks, but we're going to see a lot of blanks this quarter as well anyway, aren't we?
[00:18:12] Speaker B: Yes. So one reason is that we are post Chinese New Year. The second reason is that there has been a cargo rush before the ILA strike. And the third reason is the inventories now or recently higher than they were last year. So there's quite a number where the market in the short term is going to Be soft. And the carriers in these circumstances are very fast at canceling ships or idling ships.
[00:18:42] Speaker A: Is there much scope for more slow steaming?
[00:18:44] Speaker B: There's some. I don't think it's going to be the main driver. But if the oil prices go up as they continue to go now, there will be more slow steaming. Yes.
[00:18:55] Speaker A: Just a side point on that order book and it comes back to what I was discussing with Alan on technology a little bit. With trade wars with sourcing, diversification, near shoring, reshoring and new technologies which require less volume or products with less volume or maybe they don't need to be shipped as regularly. Maybe you can use parts but 3D printing for parts. We've also got all this talk of more regional supply chains versus global supply chains. Lots of things going on there. Does this mean that shipping demand might be less robust moving forward on the major east west trades in the future, resulting in changes in shipping economics and in fact maybe moving away from the economies of scale that made 20,000 TEU plus ships make sense, particularly on the Asia Europe trade. If so, how do you factor those trends into your long term forecast? And secondly, are the shipping lines factoring this into their orders at the moment already with smaller ships?
[00:19:54] Speaker B: Yes. You touch a number of themes. First, definitely intra Asia, which is intra regional, is the fastest growing trade. We also see India and Latin America going faster than the western economies. So there will be faster growth and more demand for smaller and intermediate ships. But however, if you look at the order book, you can see that the order book is still focused on mega ships. So in the current fleet ships, what we call ultra large container vessels, ships of more than 18,000 TUs, they currently account for 14% of the total fleet and they account for 22% of the order book. So carriers are not moving away from big ships, but just doing both, frankly, adding new big ships and new smaller ships. In fact, they are probably adding too many ships. The order book now is 8 million TU ships out of a fleet of 31 million. So that's 26% of the ship's current capacity is on order, which is huge.
[00:20:54] Speaker A: So are they ordering the wrong ships then? If they're getting so many of these larger ships, the mega vessels?
[00:20:58] Speaker B: I don't think so. I think they are renewing the fleet of large vessels partly because the new IMO targets. So with new modern destrons, we're hoping to effectively meet certain targets which are not just coastal demand related.
[00:21:15] Speaker A: So they're going to be replacement ships?
[00:21:17] Speaker B: Yes.
[00:21:18] Speaker A: Okay, if you're buying freight this year. I'm sure you'd suggest that a shipper should be using a benchmarking or index approach. And I have a suspicion that Drewry offers this service. But more seriously, in this rather chaotic market, if you're tendering, what tips do you have for shippers, especially those exposed to the Trans Pacific market, and how do they strategize around the risks we've discussed?
[00:21:44] Speaker B: So one thing that's not mentioned often is that in the last few years we found that shippers were getting better access to capacity and better rates from direct carriers than they were from nvos. The NVO seem to be a bit squeezed in a difficult market by the carriers.
So we recommend that medium sized ship build stronger and more relationships with direct carriers. We think they should also monitor the market very, very closely because it's so changeable. And we think they should try to identify when there's a turning point in the market, as soon as there's a turning point, their strategy or their contract policy. And then as I mentioned before, they should look at capacity guarantees, they should look at how the carriers or the NVOS can support them when there's a next round of disruptions.
[00:22:37] Speaker A: Thanks, Philippe. Finally, predictions tell us one thing we haven't discussed so far that shippers should look out for in 2025.
[00:22:46] Speaker B: So I think 99% of C suites will agree that shipping department must become better at resilience of supply chains. There's been an awareness of shipping matters within companies and shipping now must support more stable, more predictable supply chains. But the problem with this is that we are currently facing more and more risks, more and more volatility issues. So we think it's important shippers who haven't done it to review closely where they are exposed to risks, whether they are macro external risks or transport or infrastructure risks like the Suez Canal, or whether there are risks by, for example, depending on just one provider or not having the right type of contract. And therefore, it's important for the shippers to sit down and look at these risks and decide whether they need to review their policy and the way they procure freight.
[00:23:44] Speaker A: Philip Damas, Managing director of Drury Shipping Consultants and head of its Supply chain Advisors Practice. Thanks for joining me today on the Freight Buyers Club.
[00:23:53] Speaker B: Thank you, Mike. It's a dream.
