Latest / Container Bytes: Weekly Ocean & Air Freight Intelligence for Supply Chain Pros / Episode #41: The Saudi Red Sea Squeeze and the July 24th Tariff Transition

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Episode #41: The Saudi Red Sea Squeeze and the July 24th Tariff Transition · Container Bytes: Weekly Ocean & Air Freight Intelligence for Supply Chain Pros

• 0:00
  SPEAKER_01: Hello and welcome to uh today's episode of Container Bites, your ten minute update on the latest in freight.
• 0:06
  SPEAKER_01: I am Julia Frowine, and joined as always by Judah Lee and our freight expert.
• 0:10
  SPEAKER_01: Judah, how are you today?
• 0:13
  SPEAKER_01: I'm doing okay as well.
• 0:14
  SPEAKER_01: Alright, before we begin, just a little bit of housekeeping.
• 0:16
  SPEAKER_01: We won't have an episode next week, July 29th, but we will be back the following week.
• 0:20
  SPEAKER_01: So don't despair.
• 0:22
  SPEAKER_01: We are coming back just one week later.
• 0:24
  SPEAKER_01: All right, so let's talk freight.
• 0:26
  SPEAKER_01: So just so we thought we were maybe at least back to a situation we already knew a closed Strait of Hormuz.
• 0:33
  SPEAKER_01: Now the Houthis have announced they are closing transits through the Red Sea.
• 0:37
  SPEAKER_01: So what's the latest here and what does it mean for freight?
• 0:40
  SPEAKER_00: Yeah, so the Strait of Hormuz is closed, kind of back to where it was uh before the ceasefire, but really lower, it seems, a lower number of transits, really very few um passing through right now.
• 0:52
  SPEAKER_00: There are still attacks on vessels that are in really actually deadly attacks in the last um you know week or so.
• 0:57
  SPEAKER_00: So we've been a bit seeing a big slowdown.
• 1:00
  SPEAKER_00: There are vessels that are transiting um through you know called dark vessels, because they put their transponders off.
• 1:06
  SPEAKER_00: So there are some vessels that are going back and forth, but but very few.
• 1:09
  SPEAKER_00: Um and as you said, now we have this added dimension of the Houtis.
• 1:13
  SPEAKER_00: So the Houtis have announced that they have closed the uh Bab el-Mandeb Strait, the kind of strait at the very southern part of the Red Sea, um, but only to Saudi-linked vessels.
• 1:24
  SPEAKER_00: So vessels owned by Saudi Arabia or or any by anybody else who are making port calls uh at Saudi ports.
• 1:33
  SPEAKER_00: That announcement was made just in the last couple days.
• 1:35
  SPEAKER_00: There haven't been any attacks yet, but there certainly has been fewer vessels transiting, not none, um, but fewer.
• 1:42
  SPEAKER_00: Um, so it certainly is a big change.
• 1:45
  SPEAKER_00: Now, this is yes, related to the Iran, the US-Iran war, uh, but kind of indirectly.
• 1:50
  SPEAKER_00: There's been the Saudi um uh Houtis conflict that ended in a ceasefire in 2022.
• 1:58
  SPEAKER_00: And uh just last week the Saudis had a missile strike on the airport in Yemen to prevent an Iranian airplane from landing.
• 2:07
  SPEAKER_00: So it is related kind of to the broader conflict, but it's also a specific point of tension between the Saudis and the Houthis, which is why Houthis are making this claim not on all traffic, but only on Saudi traffic, as this is kind of seen in the context of that conflict.
• 2:21
  SPEAKER_00: What does that mean for the broader markets?
• 2:24
  SPEAKER_00: First of all, oil, right?
• 2:25
  SPEAKER_00: So Saudi Arabia was diverting some of the volumes that would have gone through the Strait of Hormuz to uh Jeddah or to other ports on the Red Sea via pipelines.
• 2:35
  SPEAKER_00: So they were piping oil away from where it would have gone on on tankers through the in the Persian Gulf and onto tankers in the Red Sea.
• 2:44
  SPEAKER_00: Many of them were then going south past Yemen and out mostly to Asian markets.
• 2:48
  SPEAKER_00: And so that's going to be a big blow.
• 2:50
  SPEAKER_00: They can go all the way around, you know, through the Mediterranean, but that's a uh adds cost.
• 2:55
  SPEAKER_00: So it will be a blow to energy markets, and we'll see what goes on there.
• 2:58
  SPEAKER_00: Certainly, oil prices are already increasing.
• 3:01
  SPEAKER_00: For the larger container market, it's probably not as impactful.
• 3:05
  SPEAKER_00: So as we know, uh carriers have been diverting away from the Red Sea since late 2023, and most continue to do so.
• 3:11
  SPEAKER_00: There are some that uh of the major carriers that have been started to be to take steps back towards the Red Sea, especially since the ceasefire.
• 3:19
  SPEAKER_00: Those will probably be reversed, although there haven't been announcements yet.
• 3:22
  SPEAKER_00: But there is regional traffic that has been going to to um through the Red Sea, kind of smaller carriers.
• 3:29
  SPEAKER_00: The larger carriers are kind of diverting container traffic all the way, you know, that's meant to go through the Gulf all the way around through the Mediterranean to um the port of Jenna, so those will won't be impacted anyway, because they're already diverting, but certainly another disruption on top of everything else.
• 3:43
  SPEAKER_01: Okay, and the hormost pressure, sorry, the hormost closure is already putting pressure on fuel costs.
• 3:48
  SPEAKER_01: Is that pushing container rates up yet, too?
• 3:50
  SPEAKER_00: So oil prices, yes, are going up.
• 3:52
  SPEAKER_00: Um crude prices are up 20% since early July, and they're back to about levels they were in in mid-June, so it kind of erased those uh decreases.
• 4:01
  SPEAKER_00: Bunker fuel prices for ocean are up 12%, so they're also back to about levels of a month ago.
• 4:06
  SPEAKER_00: Jet fuel rates are up 25% and back to mid-May levels, so they're already back to about 50% higher than pre-war.
• 4:14
  SPEAKER_00: So bunker fuel prices are going up.
• 4:16
  SPEAKER_00: Uh CMA CGM just announced that they're increasing their emergency fuel surcharge again.
• 4:21
  SPEAKER_00: But the big driver of rates right now is still peak season.
• 4:24
  SPEAKER_00: So uh as we know, we had this early peak season that pushed rates way up in June and into and into July.
• 4:30
  SPEAKER_00: But it seems that for the first time rates are evening off or even slightly declining for really for the first time since April or maybe middle of May.
• 4:38
  SPEAKER_00: And so we had this early start to peak season.
• 4:40
  SPEAKER_00: It seems now we're starting to have an early easing to peak season demand, kind of an unwind.
• 4:45
  SPEAKER_00: And we're also having carriers having added capacity towards that kind of strong demand, which is also that capacity is arriving now entering the market, and so that's also putting downward pressure on rates.
• 4:57
  SPEAKER_00: So July 15th just passed last week.
• 5:00
  SPEAKER_00: That was supposed to be a time when we saw uh additional GRIs and peak season surcharges.
• 5:04
  SPEAKER_00: These were planned and they didn't come to pass.
• 5:06
  SPEAKER_00: So that really seems to um indicate that we're just past that peak demand.
• 5:12
  SPEAKER_00: And there were projections, like for the NRF, that the big surge in demand was in bookings, um, was going to come in June and early July, with arrivals in July hitting a record, and then a 10% drop in August and another 10% in September.
• 5:24
  SPEAKER_00: So it makes sense that we're past peak demand, and that's how we're seeing rates evening off.
• 5:29
  SPEAKER_00: As we said, there's also been capacity additions.
• 5:31
  SPEAKER_00: But it's possible that rates aren't falling as quickly or as significantly, you know, they're more leveling off than they may have otherwise, because we're also having serious uh issues with congestion, especially in the Far East.
• 5:43
  SPEAKER_00: So there was just peak season congestion because of surging demand, but we've also had several instances of bad weather, including last week's very serious typhoon, and that's caused very significant congestion reports that at Shanghai there's more than 100 vessels waiting for a slot.
• 5:57
  SPEAKER_00: Uh Ningbo, more than more than 50, as well as congestion and delays at other ports like in Taiwan and South Korea and the Philippines.
• 6:06
  SPEAKER_00: Carriers are omitting port calls and offloading containers of other vessels, so that's also kind of causing delays.
• 6:11
  SPEAKER_00: Congestion absorbs capacity and puts upper pressure on rates.
• 6:14
  SPEAKER_00: So even if we're past peak demand, and even if carriers have added capacity that is now on the market, we're also having this congestion that's absorbing capacity.
• 6:24
  SPEAKER_00: So maybe that's why we're seeing rates leveling off instead of starting to fall more significantly.
• 6:28
  SPEAKER_01: Moving on to tariffs.
• 6:29
  SPEAKER_01: The US tariff deadline of July 24th is this week, and that's when Section 122 tariffs will expire.
• 6:36
  SPEAKER_01: Do you think other tariffs will be introduced soon and at what level?
• 6:39
  SPEAKER_00: Right.
• 6:40
  SPEAKER_00: So actually, one reason that we had this early peak season at least on the Trans-Pacific was because there's this tariff deadline coming up.
• 6:45
  SPEAKER_00: So we have this Section 122 that was put into effect when EPO was canceled back in February, and that put in uh 10% tariffs on all imports coming to the U.S.
• 6:56
  SPEAKER_00: But as you said, it expires on July 24th.
• 6:59
  SPEAKER_00: The White House has been working to replace those with other tariffs.
• 7:01
  SPEAKER_00: So there's the uh Section 301 investigation into um kind of forced labor issues in other countries or an info towards the manufacturing of imports to other countries.
• 7:13
  SPEAKER_00: Um and that's been moving forward.
• 7:15
  SPEAKER_00: There's been a uh the findings already released, there's been a comment period, so that will introduce about 10% to 12.5% tariffs on about 60 uh trading partners in the U.S.
• 7:25
  SPEAKER_00: And that covers like you know more than 90% of U.S.
• 7:29
  SPEAKER_00: trade.
• 7:29
  SPEAKER_00: And that will probably go into effect pretty soon.
• 7:31
  SPEAKER_00: It's almost ready.
• 7:32
  SPEAKER_00: Whether there'll be a few days between the 24th and when these go into effect, um, it's possible, but it really looks like those are going to be rolled out.
• 7:39
  SPEAKER_00: So there won't be that big a difference in terms of tariff levels between just before the 24th and at some point, possibly soon after.
• 7:47
  SPEAKER_00: There are other tariff investigations underway.
• 7:50
  SPEAKER_00: There's another 301 looking at excess capacity that's on a list of about 16 countries, and that plus the other, you know, the forced labor one together could push tariffs back to EPA levels, but there hasn't been progress on this one, or at least announced progress.
• 8:04
  SPEAKER_00: There's been no delivering of findings, there's been no announced uh comment period, and all these things are required in order to get towards uh the actual ability to introduce tariffs.
• 8:14
  SPEAKER_00: There's some speculation that this is kind of shelved until after the midterm elections because the administration doesn't want to push tariffs back up, you know, in this political season.
• 8:24
  SPEAKER_00: But it's also possible that it's just taking more time and they'll come at a certain point, or maybe they won't come at all.
• 8:29
  SPEAKER_00: So there's certainly some uncertainty, but the the uh the administration has been pretty clear that they do intend to push tariffs back up to where they were uh under EPA.
• 8:40
  SPEAKER_00: So for now, it's probably going to be around the status quo, which means slightly lower tariffs, um, or maybe kind of moderately to significantly lower tariffs than there were back when EPA was in effect, but still some uncertainty there.
• 8:53
  SPEAKER_00: Um the president also announced that he's going to put 50% of tariffs on about 5% of Canadian exports to the US, and that will go into effect in in 30 days.
• 9:03
  SPEAKER_00: So we'll see if that comes to pass as well.
• 9:06
  SPEAKER_01: Okay, so lastly, just moving on to air cargo.
• 9:08
  SPEAKER_01: In addition to the concerns we have over fuel costs, there have also been some recent changes to de minimis um in the EU.
• 9:14
  SPEAKER_01: How's that playing out so far?
• 9:16
  SPEAKER_00: Yes, so the EU suspended its de minimis exemption on July 1st.
• 9:21
  SPEAKER_00: As we know, the US did so last year in May for China and then August for everyone else.
• 9:26
  SPEAKER_00: There has been adjustments by a platform.
• 9:28
  SPEAKER_00: So instead of seeing kind of a massive drop in uh in e-commerce air cargo volumes, we see these platforms adjusting, kind of doing more consolidated uh shipments instead of individual parcels and just adjusting to the new rules, which is what we saw in the US.
• 9:42
  SPEAKER_00: We're seeing that for China, Europe as well, but again, not this massive drop, a more, yes, a decrease, but uh kind of an adjustment.
• 9:50
  SPEAKER_00: So in terms of air cargo rates, we've seen rates decrease 7% since just before the de minimis change.
• 9:57
  SPEAKER_00: So it's definitely prices are trending down, but it's not a massive drop.
• 10:00
  SPEAKER_00: We're also seeing reports of falling volumes, but also carriers moving capacity elsewhere, which is probably why we're not seeing this massive change.
• 10:08
  SPEAKER_00: Also, because as we said, the volume drop isn't uh a collapse.
• 10:12
  SPEAKER_00: One interesting thing though is that the EU member states are required to um collect a three euro charge per parcel, right, per low-value import, which you think would kind of level the playing field, and we'd see kind of similar uh uh volumes of classic changes in different countries.
• 10:29
  SPEAKER_00: But some countries are requiring kind of like a million euro deposit per arriving freighter or some significant kind of deposit that is then you know drawn down against the imports that are coming in for those fees, while others are collecting a kind of a lower upfront cost.
• 10:44
  SPEAKER_00: So I don't know if some are not doing that at all and just charging per parcel.
• 10:48
  SPEAKER_00: Um, but you're seeing different kind of scenarios in different countries, and so you're seeing different volume decreases or increases to different countries depending on where they go.
• 10:56
  SPEAKER_00: So Italy, I think, is is kind of the most liberal, and therefore we've seen more of an increase there, whereas to other countries you're seeing decreases.
• 11:04
  SPEAKER_00: To France, you're seeing an increase because they had implemented their this three euro charge, um, I think back in March.
• 11:11
  SPEAKER_00: They had chosen to kind of implement it early because of kind of objections to all these e-commerce uh packages coming in.
• 11:17
  SPEAKER_00: So they're seeing an increase in traffic now because they're kind of more level with other um regions.
• 11:22
  SPEAKER_00: So it's interesting just to see how policy changes are seeing things shake out.
• 11:26
  SPEAKER_00: But as I said, there's not some giant collapse in uh in air cargo volumes, certainly a decrease, but more uh of an adjustment as this kind of develops.
• 11:34
  SPEAKER_01: Okay, sounds good.
• 11:36
  SPEAKER_01: All right, that's all we have time for today.
• 11:37
  SPEAKER_01: Thank you, Judah, as always.
• 11:39
  SPEAKER_01: If you enjoyed the session, please hit the subscribe button and you'll get notified about all our future episodes.
• 11:44
  SPEAKER_01: Thank you for listening and have a great day.