Episode Transcript
[00:00:03] Speaker A: You are listening to the Freight Buyers Club, a home for those interested in international trade, shipping, procurement, logistics and air freight. In fact, all things supply chain in the Americas, Asia and beyond. This podcast is brought to you by your host Mike King and produced in partnership with Demurco Express Group, a global 3 PL that specializes in managing logistics to, from and within the Asia Pacific region.
[00:00:30] Speaker B: Hello, I'm Mike King and welcome to this episode of the Freight Buyers Club which is sponsored by the America Express Group. A quick announcement, A happy announcement. The last episode of the Freight buyers club in 2024, which featured S P Global's Peter Turchwell and Vespucci Maritime's Lars Jensen, had more than 10,000 downloads. That's across the full episode and the video clips I do. So thank you all for listening and watching. Freight Bias Club now has more than 2,000 subscribers on YouTube alone and I've somehow managed to end up with 13,000 connections on LinkedIn. You're all very welcome and I'm glad you like our output here at the Freight Buyers Club. So big thanks to you all for your support and a special shout out to my launch partner Dime Express Group and their amazing support and the fantastic team there led by Katherine Sheehan. Without them are my production guys Karen Ball and Tom Matthews. It wouldn't be possible to keep providing you this independent journalism that hopefully keeps you all up to date in your businesses. Please do all keep liking following, commenting and subscribing wherever you are listening or watching. It really does help. We're available on all podcast platforms, YouTube and www.thefreightbuyersclub.com. now enough of that. Later I'll be doing a full buyer's analysis of container shipping markets with Philip Damas, Head of Supply Chain Advisors Practice and Managing Director at Drury Shipping Consultants. But first UP is Alan McTaggart, VP for Global Logistics at Tektronic Industries. TTI is a Hong Kong public listed company with a portfolio of global powerhouse brands including Milwaukee Power Tools, Ryobi, AEG Power Tools, Hoover, Daredevil and Vax. Alan has spent the last 35 years working in the Far east, predominantly employed in Jardine, Matheson Group and Tectonic Industries. At the latter, he's played a pivotal role in overseeing global logistics strategies over the last 18 years as Tektronik has grown sales of US$2 billion to over 13 billion in that time. His achievements have been many and varied, including implementing key programs to rationalize the group's global and China centered transportation and supply chain arrangements initiatives which delivered Direct savings in excess of 150 million US dollars. Alan, thanks for joining us today on the Freight Buyers Club.
[00:02:54] Speaker C: My pleasure. Thank you for giving me the opportunity to talk to you today.
[00:02:58] Speaker B: All my pleasure. Right before we dive into the nuts and bolts of logistics and the, the current market, maybe we can start on this. Alan, can you tell us a little bit about your career journey, where it all started. I'm guessing from your accent it's Scotland, but then maybe about also about your roller Tektronik, which has been, it's been quite a ride. And Cora covered a period of incredible growth.
[00:03:21] Speaker C: Yeah, certainly. I started my career well. I started in college in Edinburgh and then I moved down to London in 1983 where I joined a large air freight organization at Heathrow Airport. I worked there and in Kenya for three and a half years as part of the Jardine Matheson Group, which was a company originally founded in China in 1832, which is now a massive conglomerate. I then moved with them as an international executive to Hong Kong and then to the Philippines where I spent two and a half years working in a large trading business they had. I moved back to Hong Kong in 1991 where I spent 10 years working for the Schindler Elevator Group where I was eventually responsible for purchasing and logistics for all the product that we brought into Asia. It was a joint venture with Jardine Matheson in 16 countries in Asia from Korea down to Indonesia. And I was responsible for major parts of the purchasing of major parts of the transportation. I then moved on to Jardian Logistics where my base skills were. I spent two years there. Jardine sold that company and at that point I left the company and moved into Ben Lang in Singapore for two years where I helped set up a small logistics company for Benlang. In 2005 I moved back to Hong Kong and I joined Tektronic Industries in 2006 on a nine month project to rationalize their Australia supply chain that blossomed into a full position in charge of global transportation. And the company, as you know, has grown quite dramatically since then. And my responsibilities are for all the outbound and inbound material transportation in the group, both raw materials and finished products.
[00:05:05] Speaker B: So my useless math, you're coming into your 19th year at Tektronik. So I mean it's an amazing company. You've got this massively diverse range of products and brands from power tools to outdoor equipment, floor care products. My kitchen is aeg. Actually, you know, just a little, little bit of insight there for, for people listening in, but can you give Our listeners, a brief insight into the complexity of the global inbound and outbound supply chains that you manage. What are the key final markets and what are the most important production countries for you.
[00:05:36] Speaker C: When I joined the company, our production was centered in China. We had our own very large factory in Dongguan in South China, very close to Hong Kong, where we employed 15,000 people. At its peak, that manufacturing base grew to 24,000 people. During COVID in 2018, we started to move some of our manufacturing base down into Vietnam in our wholly owned manufacturing operations. And latterly we've moved some of our manufacturing to Mexico, to Torreon in Mexico. So our three main bases of manufacturing now are are China, Vietnam and Mexico. In addition to that, we buy a lot of product from OEMs with branded and our quality control predominantly throughout China, but growing in Vietnam and growing in Thailand and Indonesia. So the manufacturing footprint is fairly complex. I would say we move a lot of cargo obviously between the raw material suppliers in China, Thailand, Cambodia and our factories in Mexico, Vietnam and China. And my role is to do that. Our finished goods markets can be broken into three main areas of activity. North America, USA, which is 75 to 80% of our sales in terms of turnover. Australia and New Zealand which is about depending between 9 and 12% and Europe which is the remainder. Europe and the Middle east and Africa, which is the remainder. So our business has been heavily concentrated in North America where originally we started with our brands. But now Europe is growing rapidly and Australia and New Zealand too, obviously a.
[00:07:16] Speaker B: Big emphasis on that Trans Pacific market and those timelines. So that China plus one diversification. I note that it starts right after the US China trade war and that first Trump presidency and that led to that expansion into Southeast Asia and Mexico. We'll definitely come back to that. But just looking at the company itself, Tektronix revenue jump from around $2 billion round about when you started there in 2006 to over $13 billion of sales now. How did that change the logistics, challenges and complexity that comes with that type of scale up?
[00:07:53] Speaker C: It has allowed us to obviously leverage economies of scale and work across the board with many more vendors and have a great deal of diversification in our supplier base. It has obviously come with advantages and challenges. I would say when I started my role in the period when the company was a $2 billion company to a $6 billion company, if I may use an analogy, we were a little bit like a middleweight boxer. We could move up a weight or move down a weight. We didn't need to Work with all the big shipping lines. We didn't need to work with all the major vendors. We could be more selective. As we moved up into a sort of eight to $10 billion company. Then it became a great deal more critical to ensure that we had all the bases covered in terms of vendors supply. Now this, obviously there was a great consolidation in the container line of business in 2015, 2016 when the supplier base narrowed. And that again necessitated us working with every single carrier that was available to ensure that we had a stable supply chain. But our business is obviously managing it to the end user from the raw material right through to the very end user at the other end of the world, whether that's in America, Australia, New Zealand or in Europe.
[00:09:14] Speaker B: When you say end user, Alan, are we talking about the consumers, Are we talking about depots?
[00:09:19] Speaker C: Well, we moved to our own distribution centers which we own and in other parts we own in America, generally our own distribution centers. In Europe we have three PLs distribution centers which we work with. Our end users can be industrial users, they can be professional tradespeople, they can do do it yourself enthusiasts and general consumers in the vacuum cleaner business. So these businesses require slightly different, well, considerably different distribution channels at the end, which my job doesn't encompass. I deliver to the distribution centers in the country or destination and that is then handled by the operating company in that country or destination. But our contracts with the shipping lines in general are delivered to the DC door, to our DC doors where we take them in and then we distribute them to the final customer.
[00:10:10] Speaker B: Okay, got it. That massive growth over the last 18 years or so, how did that drive up your freight spend, if I may inquire? And maybe if you could give us an idea of the sort of volumes you're currently moving each year. I know, maybe against what it was like 10 years ago, 15 years ago, 20 years ago. That would would be fantastic if you're able to share that information.
[00:10:32] Speaker C: Yeah, certainly. I mean when I joined the company, our volumes were in the region of 6,000 to 8,000 containers. We had a heavy bias towards the floor care business, which was volumetric but not extremely high value product compared to some of our professional power tools. Our volume globally now is in the region of 55 to 65. 70,000 fedus per year?
[00:10:56] Speaker B: Yeah. Pretty substantial.
[00:10:59] Speaker C: On the Trans Pacific we're looking at 40,000 containers this year passed, but during COVID this exploded as many, many people in our sector of business, the fast moving consumer goods where we were shipping 60,000 containers in one year. Our spend during That I call the COVID period, a two year period. From sort of March 21, March 20 to March 22, our spend went from around about US$200 million to nearly US$600 million. But that included a considerable escalation of of air freight, which as far as we are concerned is sort of cost to failure expense. But it was necessary during that period, as you understand, because of the log jams there were. And the challenges were manufacturing when there was shortages of raw materials and difficulties in finding people to work in factories because places will shut down with COVID regulations. But our high water mark, if you like, was around about half a billion to 550 million US dollars spent in a 12 month period.
[00:12:05] Speaker B: Very substantial we've seen in recent years. You mentioned Covid. We've also had all these geopolitical disruptions, I'll call them, that have impacted everything from air freight to container shipping to cross country rail services. We had all these endless supply chain blockages. As someone who manages this huge freight procurement operation, how did all of that period play out from your side in terms of how you approach the renegotiation of contracts with so much volatility around? I mean, it's essentially been a carrier's market for most of the last four years. It must have been tricky to manage.
[00:12:42] Speaker C: It's been challenging. It has depended on relationships that existed before it became a carrier's market. I mean from 2006 to the beginning of COVID in 2020, I would consider the market was fairly stable, the global market. It was difficult for carriers to make a substantial return on investment, to be fair to them. It was difficult for them to make a reasonable return on investment. The rates were pretty stable during that period with a few fluctuations. We signed yearly contracts with the carriers on the Trans Pacific route, on the European route, on the Australian route. Because of the characteristics and the vessel sizes. We left that to an NVO and we would sign yearly contracts with an NVO. As Covid approached in 2020 and the volumes began to escalate, I was fortunate enough to sign two two year contracts with carriers and two other contracts. One for 15 months, one for 20 months, which was probably lucky, maybe a little bit skillful, but these were carriers who had worked with us for a long time and this managed to hold our costs down to a palatable level, shall we say. But we still continued to sign contracts for a year under the FMC from May through to April. That's how we did it. And in Europe we signed yearly contracts. Of course you had to Go to the market and buy space from certain nvos. When we were short and we were getting spikes in demand which we couldn't forecast, and fortunately we had the relationship with one or two NVOs. Some of them wanted to show their loyalty to us, wanted to strengthen their business relationship with us, and they managed to give us space. Of course the price was very expensive, but it was expensive for everybody. But we stuck to our carrier contracts and we remembered the carriers who had supported us during the period 2020 to 2020 to 23. But there was some tooth and core behavior, capitalist behavior during that period, as you know, and in this business you just need a memory. There are still enough vendors that you can shift the volume of your business to the people that you feel comfortable working with and they feel comfortable working with you. And that way people understand what your expectations are and what will be the outcome if they don't meet your expectations.
[00:15:09] Speaker B: From a shipper's point of view, there was pre2020, good old days where there was stability. But then we had all of that. I don't know, some people called it profiteering. But one, I remember one person saying to me, the boot's always going to be on the other foot at some point.
And someone used an even worse description about having someone over a barrel. But I won't go there on this one. But things always change in this industry, don't they? You're never on top along.
[00:15:32] Speaker C: I think it's the Bible that says the wheels of justice grind slowly but surely. If you can survive long enough to wait, you will see what comes around. And Covid was, I would say Covid was a flash in the pan. Now it was a two year period. Often people talk about it a three year period. It was a two year period of crisis in container shipping. However, the carriers made a great deal of money. There was a huge amount of money during that period made by the container shipping lines. Fair enough. On the back of that there was a lot of warehousing built, there was a lot of warehousing taken, there was a lot of leases entered into which people had to try and extricate themselves from as there appeared to be a bit of a vacuum in demand after the COVID experience, shall we call it? And we saw in 2023 the rates were coming down to Europe, the rates were coming down to America and it was looking like it was going to go the same direction. 2024 before we had the crisis in the Red Sea. And so now here we are. I don't want to get Ahead of yourself here, Mike, but here we are coming into 2025 where perhaps we're going to see a stable situation. Never mind speculating about the Suez Canal opening up or other things. It looks as if demand and supply, well, demand at least will stabilize.
[00:16:53] Speaker B: We will definitely come back to that in a moment. But I just want to stick with how you manage this a little bit, this disruption after a period of stability. So I mean apart from external costs increasing, I guess explaining your higher spend internally, why are you using air freight all of a sudden? I mean I remember hearing stories about people air freighting Jacuzzis into, into the U.S. that's volumetrically. That is not a good, that is not a good move. But as you say, there wasn't that many options back in that, in that Covid period. But how did you go about explaining internally what was going on as these, these rates hit those eye watering levels?
[00:17:31] Speaker C: I was very fortunate to have a CEO at the time who understood, I think the jargon was the C suite. Everybody was talking about getting goods to the marketplace because it was very difficult unless you'd been lucky or strategic or had built long term relationships and people were delivering on those. I was fortunate. I felt I was sitting in the right part of world Asia, the origin of most of our production. And therefore I had the relationships at the top of the carrier organizations in addition to at the local offices and at the middle of the carrier organizations. I had all these relationships hopefully on a friendly, trustworthy basis and they were paying off. But I also had a CEO who would contact me every week, once or twice a week. He understood the value and the necessity to prioritize the cargo that had to be shipped and to leave the cargo behind that didn't have to be shipped. That allowed me to minimize the pressure in the supply chain. And had that taken place from a forecasting perspective, then perhaps there wouldn't have been such a bottleneck in the USA or in Europe because it seemed that a lot of people forecasted a little bit too much cargo and that's human nature. So I don't want to be critical about that. But I had the team of executives at the top of this company that understood exactly where I was and did their utmost to direct the company to ensure that I got the full support from the sales and marketing side of the organization that was at the coal face, so to speak, dealing with the consumer and this great splurge in demand.
[00:19:11] Speaker B: So Alan, it must have been great having that support from the boardroom. For many SME Shippers through that period and through to now, these higher supply chain costs and all these disruptions. Obviously Tektronik has a lot more volume, which must have made it easier to manage the volatility. Have you got any messages for SMEs about how they might deal with any of these problems?
[00:19:34] Speaker C: My message for the SMEs is identify firstly, if the prime mover, the container shipping line, is interested in handling your volume of business and you can contract with them. And if you believe that and you understand that, then you should contact with the container shipping lines depending on the value of your goods and the urgency. But as Covid showed, when the chips were down, it was very difficult to move cargo with NVOs even at the highest rates, because it seemed to me as if the container lines were dealing with their prime customers bcos. And if you like huge nvos that had fixed contracts with them, I don't see anything to be critical about there. But that was what happened during the COVID experience. Now the COVID experience could be a once in a lifetime experience.
I believe it probably will be. But if you're an SME, you need to work out if your volume is attractive to a shipping line to deal with you directly because you will get your cargo moved, providing you can forecast correctly and control your volumes, but you will not get the level of sophistication and data that you would get from using a 3 PL. That would be my experience.
But in my case we contract directly with the shipping lines, but we have a 3 PL who takes the bookings from our vendors, including our own factories and places the bookings with the shipping lines and then provides the data and the visibility and the transparency of the vendor performance, including the shipping lines transit times to the final destination, DC's distribution centers. But for an SME, in many cases you will pay more to work with an nvo, but your processes will be much simpler, more straightforward and you can focus on other parts of your business. It depends on the volume of your business, I would say, on the container volume that you're shipping. It also depends on the routes and the origin points that you're dealing with. I mean, I am fortunate that the main origin points that we ship out of are major ports. Yantian, Ho Chi Minh, Shanghai, Ningbo. These are main ports and most of the carriers have got direct services out of these ports.
[00:21:48] Speaker B: Just following up on what you said there about the carrier and forwarders. So you use a mix of carriers, but you book through one forwarder or more than one forwarder and just two other follow up questions. I like throwing them all together. Are you mainly booking Ocean freight on long term contracts or is it a mix? You use the spot market a little bit as well. And just on your point about like the boot being on the other foot, how you look at carriers versus forward as long term versus short. Did this change post Covid?
[00:22:15] Speaker C: Post Covid the changes in the marketplace meant it was necessary, it was beneficial to the company that we recover 80 to 90% of our contracts on fixed carrier one year contracts in America on the FMC terms from 1 May to the end of April, in Europe on the calendar year terms from 1 January to the end of December. And that's what we still do. But depending on how I think of the market, such as this year where I believe the market will fall away, I have left a little bit open to use NVOS when the market falls below my carrier rates. But I will still fulfill my carrier volumes on those rates. But I have moved to using NVOs or maybe 10% of the cargo on the European business, not so much on the Trans Pacific, mainly on the European business.
[00:23:07] Speaker B: Okay, I'll come back to this current market. Just a quick question on the carriers, right? Some of them we saw in recent years they've moved away from port to port services and more towards these end to end delivery or integrator or logistics solutions provider.
Put whatever title you want on it. Has that changed how you view carrier versus forwarder that equation at all?
[00:23:30] Speaker C: Not in the slightest, no. Vertical integration looks like a logical step in many businesses. I'm not very clever but in you know and a 3 PL is a logical extension to Prime Mover as I call them or a container shipping line. I mean we had Damko for mask. We have SIVA with cma. These operations work. I mean I use our company uses SIVA in certain places as a booking agent to provide data. But the underlying carriers would be a different shipping organization. But it doesn't change the way I look at it. I look at A3PL as an entirely separate organization from a carrier.
[00:24:10] Speaker B: Even when they're in the same business like SIVA and CMA cgm.
[00:24:13] Speaker C: Yes I do. When they're in the same business as CMA cgm, I look at it as a different. I mean as I say I have used C. I don't want to pitch for individual companies here, but I've used them in countries in Asia and they have been a competent cpl. To come back to your question earlier, where we use a CPL is as a booking agent to America. We use one company as a booking agent to handle all our bookings for the 40,000 containers to America. They're not a big company, but they're pretty highly dedicated to us. We are their biggest account. They have team of people solely dedicated to working with us and shipping lines and prime movers understand that we are the big company behind them. To Europe we use a different company, but the business to Europe is more complicated in the sense that it has to be delivered to the final VCs in Germany, Poland, United Kingdom, France and the Netherlands. But we are only using 2 NVOS or 3 PLs. Sorry, 3 PLs for the origin booking. But since COVID I have used nvos occasionally for cargo to Europe because the market falls below the shipping line set rates. But I always keep my volumes with the carriers that I commit to at the beginning of the year or thereabouts.
[00:25:31] Speaker B: I'll be interested to see how that that 3 PL set up with carriers works in terms of the under the bonnet KPIs and what you expect from your carriers and the tech behind it just on the line still, you did a presentation titled do the Liners Care what the Customers want. A while back this was a BCO perspective on the liner industry essentially. Now I raised this because I'm wondering what you think about Hapag Lloyd's new Gemini cooperation with Maerse, which is promising 90% reliability.
Is this customer driven, do you think? And is this something you think shippers will support or maybe pay extra for?
[00:26:10] Speaker C: Well, I mean this is a transshipment service as I understand it, and shippers tend to be a little bit wary about transshipment even in this day and age with technology. But these are two large successful companies and providing its price competitive, people will test the product. While I think about it, I think it's perhaps driven more internally than externally. I believe that they complement each other in the disposition of vessels. But I also have a good relationship with both those carriers in terms of providing customer service and communicating with my staff in my organization. But I think the genesis perhaps of Gemini is more inward facing than outward facing. I don't mean to be too critical, but you ask me a question, I'll give you an answer.
[00:27:00] Speaker B: I appreciate that. I'll just clarify to our listeners there. So there is with the hub and spoke system, a lot of the risk is on that final leg with the feeder, which isn't always owned by the carrier and some people in terms of that internal looking strategy. Now some analysts have said that the carriers have done this because they don't have enough ships to actually do a global service otherwise. So they've come together out of necessity. But I did put this to Henrik Schilling, Managing Director for Global Commercial Development, Hapag Lloyd on the Lodestar podcast last week if anyone wants to check that out. And his view was, no, that's not why we've done it. This is aimed at improving service levels. He also said it'll be price competitive. So that ties back into my second question there, Alan. If they achieve 90%, will people pay for it? You mean 90% schedule reliability is their, their target by summer on all of their trades?
[00:27:58] Speaker C: That's utopia that that is. That's just not going to happen if you ask me. But I don't expect it and I don't need it. And I would put forward, having made perhaps an inflammatory comment, have it put forward, one that most large shippers, the transit time, give or take a week and a half, is not critical. The critical thing is the visibility of the transit time, the coordination with the carrier and the management of the vendors at origin and their performance on time. As I said to you, forecasting is up there with astrology when it comes to reliability. But the sailing schedule providing, we can see what it is. But in the time I've worked with TTI to come back to your questions of the history of my career in this organization, the transit times have got longer and the schedule reliability has got poorer. So I'm sorry to say, 90% schedule reliability, I wouldn't want to put too much wager on that. But you know, I wouldn't hold that against either of the companies involved in Gemini, but I just, I'm not sure if it's achievable. I wouldn't try and sell it to my C Suite at 90% reliability, but they wouldn't need it either.
[00:29:16] Speaker B: Okay. What's your take on, on current freight markets this year? There's a, there's a lot of uncertainty out there. Let me start with how did Asia, Europe contracting turn out? If I'm assuming that they're all signed off now, but maybe that maybe they're not. I did hear some people have been waiting for much later this year because there's been so much, so many question marks at the start of 2025. And also what's your view on, on the Trans Pacific, which I know obviously is a much bigger part of your business and I'm presuming you'll start negotiating that in the, in the coming Month or two.
[00:29:46] Speaker C: Well, you're English, so you knew who Messi Thatcher was. I was.
[00:29:49] Speaker B: Well, I'm from Liverpool. I'm not sure that. Does that count as English? Exactly. I don't know. To be 50. 50.
[00:29:54] Speaker C: She wasn't popular in Liverpool, I don't think. But you can't buck the market or you can't buck the market for very long. So I think the first thing I need is space protection. The second thing is price. I think in 2023 coming out of COVID and 2025 coming out of the Red Sea crisis, the carriers are obviously keen to hold the prices up, and with the bcos, who are the first parties that they tend to negotiate with. So I think contracts have been entered into which are probably high compared to what the demand will be in the market. But I don't know what the macro situation will be or indeed what will happen with the Suez Canal. I mean, there's a lot of talk about the Suez Canal opening. There's a lot of talk about tariffs, but all things staying the same as they are. I would suggest that it will be a softer market this year than it has been last year, and we shall see what the NVOs achieve. The other thing that I find very interesting is the carriers are now producing rates by vessel in China. So you can log on to a vessel in China and buy a specific freight rate, rather like you could with an airline seat, or you can with an airline seat now, but you've been able to do it for a long time. But this is something I think only started in Covid. In a rising market like Covid, it's maybe all right to sell containers on a vessel by vessel basis in a fallen market. If you're selling containers on a vessel by vessel basis in a country of 1.4 billion people, it could be a recipe for pain. So it'll be interesting to see what happens with the rates this year from Asia to Europe. I would think they'll be a little bit below where they were last year. And you've also got carriers with different objectives, as you've just spoken about. You have Gemini, which the partners would like to be competitive. You have Mediterranean Shipping doing things on their own now. You have a new alliance. I think it's called the premier alliance. And then you have the other alliance. They may be eager to prove themselves in pricing ways, I'm not sure. And schedule reliability.
I'm not sure the criteria. But you have a lot of factors out there which are unknown apart from the macro factors and the geopolitical factors. So I think the market to Europe this year will be quite competitive. It will be a buyer's market. America, the TP market is generally a more stable market. Things have changed. I believe the pricing will be sensible and firm. That's what I would say on the usa.
[00:32:32] Speaker B: Have you got a lot more certainty on the US Now? We haven't got that US east coast and Gulf coast dock worker strike.
[00:32:39] Speaker C: Yeah, I think there was a lot of forward loading for people concerned about that event and the one that before when the port shut down for a short period and I think people there was a great deal of panic, perhaps the wrong word, but conservative behavior, people shipping early. I think there's no problem with cargo movement actually the forward. There was no problem with space either. There was no problem with space to Europe last year either. You could buy it.
There was nothing like Covid space was available at the price and there's a great deal of void salience as you know. So the other factor is we don't want a one sided conversation here, but there's a great deal of supply coming into the marketplace. A massive amount of supply coming into the marketplace.
[00:33:24] Speaker B: Well, I'll be able to put some numbers on this in the second part of this podcast when I'm talking to Drury's Philip Damas. But as on a rough basis we're sort of like 27%, 30% of the in operation fleet is due for. Well is in the order book is equivalent to 27 to 30% of the current operational fleet. Philip will probably say something totally different, but that's the numbers I've got to hand. Now there is the possibility that some of this order book can be pushed back. So it's not all coming in, but it's a massive order book. Historically we've got a lot of ships coming in. Now there hasn't been a lot of scrapping, but there will be more scrapping if the market drops. I'll just reference where we are on sewers. What we know about sewers at the moment is the Houthis have said they will stop attacking shipping but there's a big caveat there. If it is rail linked, they won't. Which if you're an insurer isn't much of a guarantee. So at the moment, from what we know on the 21st of January, most of the lines are still planning to carry on diversions around southern Africa if Suez does open. What we're expecting is we're going to see massive bunching of ships at port. So we'll see a lot of port congestion. So we'll probably see three or four, four months of chaos before everything gets back in sync. But then we would be looking at excess capacity.
Sorry, Alan, did you want to carry on? I just thought I'd throw that in there for listeners.
[00:34:42] Speaker C: Oh no, I don't disagree with any of those things. I think we're looking at stability and that will certainly take the heat out of freight rates. But there are factors, as you say, port congestion. But I don't think they'll be around for too long, much as some of the journalists would like them to be around for a long time.
[00:35:02] Speaker B: It does give us more to talk about.
[00:35:03] Speaker C: To be fair, I don't think they'll be there for too long. I think we could be going back to quieter times.
[00:35:10] Speaker B: Quieter times. We've had a few false dawns on quieter times and normality.
[00:35:16] Speaker C: Well, that could be wishful thinking. But if you go back to what I said, I mean Covid started as a transportation challenge in March 2020. It really ended in April 2022. There was a lot of wild pricing, three year contracts with your arm up your back, et cetera, et cetera, et cetera. But eventually the market fell back down in 2023. There didn't seem to be any creative new models that came out for the drop off in demand in 2023. And in 2024 it was looking pretty sick too, until the Red Sea happened. So why would we think it should continue to be volatile? I don't see any reasons for that to happen. Perhaps global geopolitical affairs. We've just had a new president. We've had a lot of talk about tariffs. Certainly that's going to have some effect. But I think there's been a lot of panic and planning and cargo shipped ahead already because of the disruptions in America on the east coast and the general fear of geopolitical uncertainty. People have shipped a lot of stuff early and there's a lot of space in warehouses given the overflow from the COVID experience where there was a lot of warehousing, contracted, et cetera. So I don't believe we're going to hit volatility. How about that for put my neck up?
[00:36:42] Speaker B: You're a braver man than me based on the last few years, but so.
[00:36:47] Speaker C: I've got a record of making predictions and I wouldn't go for 18 years. The most of them have worked well, I hope you.
[00:36:54] Speaker B: Well, actually do. I hope you're right. I must admit as a journalist, there's more to Talk about when there's more disruption. Should I put that out there?
So just on how you plan for this change in logistics landscape, you talked about geopolitics. We may have peace in the Middle East. We don't know what's going to happen in the Black Sea. We don't know what's going to happen around Taiwan. There's all sorts of things. There are potential more friction points and we don't know how the US China relationship's going. If you're looking at this on a long term basis though, we are expecting tariffs, say we're talking 21st of January. These announcements haven't come out yet. You mentioned earlier that you've diversified since the start of the US China trade war and the first Trump administration from 2016, 17, 18.
Are you thinking that this more diversification, more China plus one is where Tektronik goes in the future just to reduce your risk as this logistics landscape changes?
[00:37:47] Speaker C: Well, China is a tremendous manufacturing base and it's been a great partner for tti. And that's not a political statement. It's been an easy, easy, easy country to operate in with a perfect infrastructure. Vietnam is a productive place for TTI also and that's working well for us in terms of as long as there's a tariff consternation or actual tariff problems and challenges, outsourcing will continue. But what you haven't mentioned is robotics. Robotics is growing and growing and growing in our factories. Also, the requirement for huge numbers of labor in a lot of these fast moving consumer goods businesses, light industrial goods businesses, is not as severe as it was before. Therefore, in theory, you could move some of these manufacturing businesses to countries, shall we say? Well, there isn't such a labor force as perhaps India or Thailand or Cambodia or Vietnam or China. I'm not sure how realistic that is. But robotics is playing a big part in manufacturing nowadays. I mean, Elon Musk has appeared in the media a great deal recently. His experience with automation is interesting.
He's had it, he manages it, he's implemented it and it's been successful, I believe, in his car manufacturing. We are using it in our factories. It's helping TTI a great deal. It does expand the amount of places that you can actually go and manufacture. But at the moment we don't see any great need to spread our sourcing. We have also a small manufacturing base in Eastern Europe and we are looking at it in greater detail. But at the moment we are quite comfortable with our sourcing sources for our business and the growth that we Forecast and we have considerable growth continued to.
[00:39:40] Speaker B: Be forecast just on the technology. Another factor when people look at ocean shipping demand and they're forecasting ahead is is the miniaturization of a lot of products and the fact that say for parts maybe you can use 3D printing if you need an edge in part rather than manufacturing it in China. Do you look at that ahead and go, okay, well maybe our volumes might fall over time even if our sales grow. Or are they not factors in your industries so much?
[00:40:06] Speaker C: We have various different types of product. Obviously some of it's volumetric, some of it's dense. We ship a lot of lithium ion batteries which are dense. I am not involved in that technical side of the business. We're always looking at more efficient types of packaging to reduce the size of the packaging but maintain the integrity and the quality. But I couldn't answer that question Mike, to be honest with you. I don't see us downsizing the actual size of our products.
They're necessarily that size. They have to have that bulk about them. I mean our power tools, our professional power tools are, you know, they're built to last. They're built to do a job and they're specified to such an extent that there's not a great deal we can do. I don't think to minimize the size of them, maybe made a different material to the future and maybe slightly lighter, but I couldn't comment on that.
[00:40:58] Speaker B: You must be a high value customer for a shipping line as they're forward projecting where their demand's going to come from. Because in a lot of industries that is a disruptive factor for the carriers. If I may zoom into the nuts and bolts of your job and what your team does, what are the key metrics or KPIs you focus on or make sure are included in your contracts to ensure everything runs smoothly. Especially as we see these demand and market conditions changing.
[00:41:23] Speaker C: For our contracts we are primarily requiring a committed space per week for shipments on some port pairs. That's what we stipulate in our contract. We wish for a fixed price with a quarterly adjustable fuel component in the contracts. We wish for no PSS wherever possible. This has been possible but sometimes not achievable in the last two or three years. But some carriers it's been possible with. These are what we look for in our carrier contracts. And we look for committed, as I say, committed penalties both on ourselves and on the carriers for non performance.
And those are the key things. We look for our KPIs in our own department are to deliver the goods to ship the goods within a shipment window as booked by the vendors, providing the vendor book on time. The shipment should be ready to move within a certain period of time at a certain budgeted cost for the whole year. We also work on one month rolling forecasts, one week rolling forecasts, three yearly budgets, three month revised forecasts, and we use that for planning with the carriers. And our 3 PL provides us the performance of the carrier in terms of bookings, containers, sis issued, container availability, road cargo transit time detention and demurrage at port delays, at port delay in transit. And this is what we report to the operating companies that are customers in the group, which are the consignees basically, and the factories.
[00:43:08] Speaker B: We'll just take a short break. We'll be back with you in a second.
[00:43:14] Speaker A: This podcast is proudly produced in partnership with DeMurco Express Group, a trusted provider of global shipping and contract logistics services in Asia, Europe and North America. DeMurco's particular strength is in Asia, where it gives shippers the freight capacity and local market expertise to streamline freight movements to and from the region, particularly for Trans Pacific lanes. With 130 forwarding and logistics locations across China, India and Southeast Asia, Demurco connects Asia with the world like no other Global 3+. You are listening to the Freight Buyers.
[00:43:48] Speaker B: Club in terms of managing that operation. Alan, what types of logistics technology are you using to make sure everything's flowing smoothly and make sure you've got the transparency across all these really complex supply chains? Or is this where your 3PL comes in handy? Is this all is this the bit that's outsourced and then you can manage it via the 3PL.
[00:44:09] Speaker C: We're using our 3PLs platform, we're using Infranexis, we are using dedicated 3PL platforms. That one has worked with us for 15 years is constructed around our requirements. It's not as sophisticated perhaps as some of the packages that are out there, but it gives us what we really need. We absolutely require vendor management and measurement of the vendor's bookings accurately and the cargo ready to be and the sailing date. And if there's feeder vessels, except from places such as Cambodia, Myanmar, Indonesia, et cetera, we need to measure dwell time between the feeder vessel and the master vessel. And we're using the three PL's platforms for that. Companies like Siva Logistics, Ziegler Transportation, SECO Logistics, we use their platform, but we also it's also important that the personnel structure of these organizations, these three PLs we're working with well the jargon nowadays is a control tower, but we require a person responsible sitting in Hong Kong for the businesses we have. We are still headquartered in Hong Kong. Our center of gravity is South China in manufacturing and our own factory and also Vietnam. But we manage the business of Hong Kong. My staff sit primarily in the office in Hong Kong.
[00:45:31] Speaker B: How important is the human element alongside all this technology? I mean, you're still out there meeting people face to face. You still want to have that personal relationship with whoever's supplying your services or your technology.
[00:45:42] Speaker C: The human relationship's absolutely vital. And I think some organizations lose sight of it. I'm not sure whether it's from a cost point of view or whether it's from a control perspective, but they seem to prefer not to have too much of a human relationship. I mean, I always, what with my team, and when the market's soft, if you like, in our favor, we always treat our vendors the same as if the market's strong and challenging in the terms that we have to get, push for more space or push for better performance. We like to think that we're equitable. Well, we don't think that we're equitable. We are equitable, but we need an escalation path. We need people in charge. And that's how we work with our CPLs. And we do the same with our shipping lines. We like to work with the shipping line at the top of the region as well as the local offices in each country. Be it in Ho Chi Minh, be it in Tanjong, Palapas, be it in Ningbo, Shanghai. We like to know the local people in the shipping lines there, as well as the senior people in the regional head offices and if possible, the CEOs even of these lines. Because our business is so big. But we prefer to work at the operational level. But we find it's necessary to have the accountability at the top of the.
[00:46:59] Speaker B: Hierarchy also, just on that tech. I mean, when I interview people, they quite often say, in this day and age, why haven't we got enough cargo visibility? Why haven't we got. I need more transparency in my supply chain. You sound relatively happy with what you're getting in terms of what you need. Would that be the correct summary?
[00:47:17] Speaker C: That's a good question. We're happy with the business going to the USA until it gets to the poor.
[00:47:23] Speaker B: Right? Okay.
[00:47:26] Speaker C: When it moves on the railway lines internally, it can be difficult to keep on top of it. There are various portals provided for that and various companies that specialize or claim to specialize in providing Visibility, but to get the connectivity is difficult. But what we tend to find is when there's a problem from the carrier side, they will have the data. When there's a problem that we need to do, we have to chase for it. Okay, so the proactivity, to use that word.
Some carriers have a great deal of data which they will provide you when you make a mistake, but they won't proactively provide you it.
[00:48:04] Speaker B: But can't you put this in your contracts?
[00:48:06] Speaker C: Yeah, you can't. You can. And I'll pay a consultancy fee for that, Mike. Yeah, but.
[00:48:13] Speaker B: Okay, I've got another question about the tech side of this. On the freight procurement element, there's all these ways of managing, managing risk and there's all these new platforms, whether it's air or ocean. Are you using any of them at all? Or again, Is this your 3 PL and you work it out with them?
[00:48:31] Speaker C: We do have purchasing software which we use in the purchasing department of the company, but we don't use it for the freight tenders. The freight tenders, we manually collate it on massive spreadsheets for 60 to 70,000 feu.
[00:48:46] Speaker B: That's old school, isn't it? There's no way of AI ing it.
[00:48:49] Speaker C: It's not that difficult.
[00:48:51] Speaker B: Isn't it? It sounds it.
[00:48:52] Speaker C: No, it's not.
[00:48:53] Speaker B: Maybe I should learn how to use Excel.
[00:48:55] Speaker C: It depends how. You want to overcomplicate things. A lot of people would like you to overcomplicate things. It's not complicated.
It can be. I am fortunate in the sense that tti, some of the routes are not complicated. A lot of the big companies out there and the SMEs will have many, many different destinations and be much more complicated. And they have more reason to be using a software platform for reviewing the tenders.
[00:49:22] Speaker B: Alan, it's been a real pleasure to spend this time with you and Anne. You've been very open and honest about TTI's business. I just got a final question for you. We've got this. This strange evolving trade landscape and relatively volatile market. You're expecting it to stabilize. We will see. Time will tell. But have you got three tips or lessons or pieces of advice from your career that might help people in the business of buying freight navigate the next few years?
[00:49:51] Speaker C: Yeah, that's a good question. I would do not accept the business being depersonalized. Ensure that you know people in the vendors you're dealing with at the senior level. You know the benchmark, the practices of organizations your size in the marketplace and you have your These are four things I'm going to say to you. You have your contract watertight, are as equitable as possible, but reflecting the key requirements. Criteria requirements. But you also have the local relationship with the people who are executing on behalf of your vendors. I was very fortunate too when I started this journey to work with a man who spent 50 years in Asia and has just retired in his 70s. And he identified the strategy that would work in TTI, which was working primarily with the shipping lines directly to Europe and to America, not to Australia, because that's a different marketplace, different vessels and different level of volatility. And that essentially was the foundation we started on. And that worked very well because we were large enough to work directly with the shipments and get the attention we required and yet use a 3 PL for the complex part of dealing with the vendors in China, Vietnam and all over Asia. So you need an understanding of the size of your business compared to other businesses you know out there and what's the common practice. But don't depersonalize it. Ensure that you know people at the top of your vendor as well as people at the bottom. And contractually ensure you ask for the critical success factors you need, which in my case is a fixed price with a varying oil component affect space allocation and the compensation cost. If you can't do such things from either side, I hope that's helpful to your followers.
[00:51:51] Speaker B: So cut out surcharges as much as you can.
[00:51:53] Speaker C: Well, we never paid any surcharges until Covid. Okay, but perhaps that's the brave new world. I'm not sure it is, but we never paid any surcharges for up until 2020.
[00:52:06] Speaker B: I think probably there's a lot of people listening. Electric light bulbs just going on in their head about how they might approach the future. Drury's Philip Damas will be joining in a moment to look at container shipping freight market. But for now, Alan McTaggart, VP for Global Logistics at Tektronic Industries, thanks so much for coming on to the Freight Buyers Club today. It's been a real pleasure.
[00:52:25] Speaker C: Thank you very much mate.
[00:52:31] Speaker B: As trailed I'd like to now welcome to the Freight Buyers Club Philippe Damas, who is the managing director of Joe Drury Shipping Consultants and head of its supply chain Advisors practice. Hello Philip. Welcome back.
[00:52:44] Speaker D: Thanks for having me here.
[00:52:46] Speaker B: 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 Freighter 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?
[00:54:06] Speaker D: It is, yeah. So as you mentioned 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 developments, there may be companies which 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 race 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. 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 and 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 one week and 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, that 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.
[00:56:05] Speaker B: Probably one link there for shippers as well. I mean, a lot of cargo carry 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.
[00:56:17] Speaker D: 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 these portraits 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 fall.
[00:57:33] Speaker B: 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 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?
[00:58:16] Speaker D: 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 linked contract where the rates would fall when the market falls, which is a bit difficult to run frankly. They're not 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% of your contract and the other 20% remains in the spot market. So you will benefit from the change in the market when it comes split the risk.
[00:59:24] Speaker B: 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 bunch of things going on there. Obviously we have this new with the new Trump president, we're still seeing where that works out. Just briefly, what should shippers be looking to negotiate including contracts with carriers and forwards in Q2 when that trans Pacific contract negotiations start being opened?
[01:00:04] Speaker D: 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 cancel 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 we should negotiate that. Any previous Suez Canal surcharges, if you ship say from Asia to US east coast via or in Africa, the surcharges should disappear when the Suez Canal reopens.
[01:01:00] Speaker B: 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 and 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 particularly?
[01:01:52] Speaker D: So I think to start with the day to day, I would speak from 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 and 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 Trump administration put types against China, you could import from Vietnam instead. So it was a shift in sourcing. If Trump imposes tariff 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 I'm working for, are looking at trying to support their sourcing teams because Mexico is in the target aim of 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 risk, the availability of containers? So they have to start the planning now because they want to support any.
[01:03:30] Speaker B: Shifts in sourcing 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.
[01:03:47] Speaker D: 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.
[01:04:25] Speaker B: I'll just clarify a little bit there on that. So this, this ruling, I think it was from the Department of Defense, 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.
[01:04:45] Speaker D: 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, for carriers and forwarders and shippers. So we stick with previous previous forecast. There will be a slow increase in demand this year.
[01:05:24] Speaker B: There's been a lot of talk about the Panama Canal and also Greenland.
[01:05:27] Speaker C: Right.
[01:05:28] Speaker B: So the shipping link for, for Greenland is if ice caps melt further, Greenland becomes more significant. It also is a, is a home to China and Russia are looking at Arctic shipping a lot more. 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 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?
[01:06:09] Speaker D: I think it's too early to tell.
[01:06:10] Speaker B: You 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?
[01:06:34] Speaker D: This. 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. You know my previous colleagues who work for MERS in crotch input departments said it's a very high risk trot implement just too high risk. Imagine the ILA strike, what it would have done to the 80% 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?
[01:07:53] Speaker B: I spoke to Henrik Schilling at Hapag Lloyd on the Lodestar podcast last week and just to clarify on 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?
[01:08:26] Speaker D: 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.
[01:09:43] Speaker B: So just on that supply side. So there's a lot of factors that will determine Lyna 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?
[01:10:06] Speaker D: 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.
[01:10:36] Speaker B: Is there much scope for more slow steaming?
[01:10:38] Speaker D: 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.
[01:10:49] Speaker B: Yes, 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. 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, yes.
[01:11:49] Speaker D: 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 megaships. 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.
[01:12:48] Speaker B: So are they ordering the wrong ships then? If they're getting so many of these larger ships, the mega vessels?
[01:12:53] Speaker D: 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 vessels, we're hoping to effectively meet certain targets which are not just cost or demand related.
[01:13:09] Speaker B: So they're going to be replacement ships?
[01:13:11] Speaker D: Yes.
[01:13:12] Speaker B: 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 you know, 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?
[01:13:38] Speaker D: 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.
[01:14:32] Speaker B: Thanks, Phillipe. Finally, predictions tell us one thing we haven't discussed so far that shippers should look out for in 2025.
[01:14:40] Speaker D: 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 transporter 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 this risk and decide whether they need to review their policy and the way they procure freight.
[01:15:38] Speaker B: Philippe 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.
[01:15:48] Speaker D: Thank you Mike. Thank you.
[01:15:52] Speaker B: Thanks to demeco Express Group for making today's episode possible. A quick note. You can find me next on the very first episode of the Lodestar Air Cargo podcast, which launches next week. We have two huge exceptions exclusives, one with Jan Krems, president of United Cargo, and the second with Tom Bradley, Amazon Air Cargo's Global Director, in his first major interview with the trade press. What a way to start. So please tune in just to finish. As ever, big thanks to my editors Karen Ball and Tom Matthews. Until next time, thanks for listening to the Freight Buyers Club.
