Supply Chain Secrets
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Supply Chain Secrets
Contracts, Tariffs, and Turbulence: Why “Fixed” Ocean Rates Aren’t Fixed
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In this episode, Caroline Weaver and Lars Jensen break down the latest shifts in ocean freight rates, revealing why long-term contracts offer far less insulation from spot market volatility than many shippers think.
They compare NYFI and CTS data to show the hidden correlation between contract and spot pricing, then dive into a volatile week in trade policy—from unpredictable “reciprocal” tariffs to a surprise penalty on Indian imports that could hit cargo loaded before the rules even existed.
Hi everyone, welcome back to the Supply Chain Secrets Podcast. I'm your co-host, Caroline Weaver, and with me is the esteemed Lars Jensen. Lars, how are you doing?
SPEAKER_00Hello, and great to be back here again. Just a heads up for anybody listening out there live. I'm calling in from Zanzibar, so my internet connection might be a little bit unstable. If I drop out, I will come back on quickly again.
SPEAKER_01All right. Well, sounds awesome. Let's get into rates. Where are we at right now with the ocean rates?
SPEAKER_00In a word, going down. Not massively. It's not like rates are collapsing, but they are continuing downwards. That goes for Pacific, it goes for Asia Europe. On the Pacific, of course, it's the continuation of what we talked about in recent weeks that the spike from the tariff force has completely evaporated. A lot of you as import are still playing wait and see. And on Asia Europe, we are simply nearing the usual tapering off, maybe a slightly early tapering off of the peak season.
SPEAKER_01All right. So kind of expected for where we're at with the Asia Europe rates and um TP EB rates are basically just continuing to do what we've been seeing over the last few weeks.
SPEAKER_00Yeah, and indeed they are. And what I thought would be interesting to do this week, and I know we we quite a while have been comparing the NIFI actual paid spot rates to the um quoted spot rates from, for example, the SCFI. What might be interesting is to compare the paid spot rates with the CTS index. For those unfamiliar with CTS, it's container trade statistics. They get their data from most of the large container carriers. They don't publish rates as dollars, they only do it on an index basis. But the interesting thing here is it's also based on cargo that is actually loaded, but it's an amalgamation of both spot and contract rates. That's the important part. So the starting point here is if you look at the orange line, that's the CTS index. That's the right-hand Y-axis, so it's an index. The blue one is the NIFI measured in this case in dollars per 40 foot. This is Trans-Pacific eastbound. Couple of things here. First of all, we see there is some degree of correlation of force between the two, but from a data perspective, the challenge here is how do you calibrate the two? The observant viewer here will, of course, see that the NIFI is measured on a scale starting at zero, whereas CTS does not. And it's one of these where you can lie with statistics all you want. You can often make graphs look like each other, but the devil is in the detail. How do you translate between the two? And of course, here's the thing: what should you do as a baseline? The challenge here is CTS has a very, very long track record. There's data going all the way back to 2008. Whereas NiFi is a relatively new kid on the block, there's data for about a year. So an interesting element is to try to translate both of these into the same type of index. And if we go to the next graph I brought, this is exactly what I tried to do. What I did here was, yes, somewhat arbitrarily, said, what if we said first quarter 2025 is the same index for both NIFI and CTS? The rationale for choosing Q125 is that this clearly is way after the Red Sea crisis has had its impact. That's the norm. And it is the last quarter before we see the major impact from the trade war. So for all intents and purposes, this could be called a semi-stable period. So if we do it and say both of them are index 100, first quarter 25, what is the path that we are then seeing? Well, what we see here, if we look slightly back, during peak season last year, we see the spot rate index from NIFI was much higher than what CTS implies. This should not surprise us. This is actually what we would expect. Because during the absolute peak last year, in the throes of the Red Sea crisis effects, we had a tight market, which also means spot rates would typically be much higher than what you would expect for contract rates. So CTS, which includes both spot and contract, would obviously have been less impacted than the pure spot. Then both of them are, by design, more or less at the same level, Q125 as how it's been designed. What then happens as we progress? Well, as we first get impacted by the trade war from April onwards, we see spot rates drop significantly below the CTS index. This again is unsurprising because we head into a market where there is excess capacity, spot rates are dropping. In this kind of environment, we of course always see it below. We then get the small spike in NIFI as we head into this micro spike we talked about, late May, early June, rates are going down again. The CTS index is always lacking. This includes the newest data, cargo loaded in June, basically because CTS is to some degree constrained by EU legislation in terms of how often or how late they can actually come up with some of these data. So what we're seeing here is we're seeing spot rates, they are indeed more volatile than when we include contract rates. We see a market where, to some degree, contract rates are less volatile than the movement of the spot rates. And again, bear in mind CTS includes only cargo loaded, just as with NiFi. So some contracts allow some shippers to move some of their volumes on contract, shielding them slightly. But overall, what we also see is that the pattern of development is very, very similar. If we think back to the first graph I showed, maybe Caroline, if you could go back to the first graph there, what is actually very evident here is just how tightly correlated this is. What does that tell us about the market? Well, it tells us that contracts are not really an insulation from the bakeries of the spot market. Actually, it tells us quite the opposite. It tells us even though you have contracts, you are just as exposed to the volatility of the spot market. It might be slightly less, it might be slightly dampened, but you are exposed to exactly the same bakeries. Which then leads down the path of why have some of these fixed rate contracts anyhow, since they do appear at least in the aggregate to move in line with spot. It might make more sense to then try to explore options in terms of index-linked even contracts. And you say, Well, why would I index link to a spot when I got a fixed rate? What the data shows you very clearly here is for the market overall, there is no such thing as a fixed-rate contract. What this does show us is that even for fixed rates, much of this does tend to move in sync with the spot market. There might be a variation of plus minus a month. There is a dampening effect, so there is no stability to be gained from fixed-rate contracts in the aggregate. So that's basically where we are on uh rates right now. Where are we heading in rates in the coming weeks? I think we covered that uh to quite a degree uh last week. I would encourage the listeners to maybe re-listen to the podcast from last week. But basically, I would still expect another mini spike here as we get into September, on account of the developments that we should expect to see on tariffs going forward.
SPEAKER_01This is uh really interesting stuff. I think the way that you compared the two and equalized out the index versus what the actual price is is really interesting. My main takeaway here is that while you if you have a long-term contract, you think you're kind of shielded, you have a bit of a cushion, it's really not that much of a cushion. You're still following the same trends, the pattern line is about the same. There's you know a small amount of margin, but yeah, overall you're really following that same trend pattern as the spot market.
SPEAKER_00Yeah, and and as we know, I mean, if you if you go and talk to many of the shippers out there, they of course also know this. Sure, you might be a very, very large shipper, and sure you might get quite a bit of your cargo moved on that contract. But if you're a medium-sized shipper, you are having these discussions time and time again with the carriers when the market is tight. How much additional surcharge are you willing to pay in order not to have your cargo left behind? And as a carrier, you have these discussions with the shippers when the rates are going down. How much of a rate discount do you need to give to actually get the volume that the shipper contracted to? This is not new. This is how the market has been operating, at least the 24 years I've been in it. And this is just the data showing that that is indeed the case.
SPEAKER_01Yeah, it's a great point. Most of the contracts, even though it's a contract, it's not legally binding. You do have a few exceptions where the carriers and the shippers are held to a higher standard of meeting volume commitments. But you're right, for the most part, it's a matter of how much are you willing to pay in order to be able to move on that contract.
SPEAKER_00Yes.
SPEAKER_01All right. Well, great stuff here. Any final thoughts or should we move into tariff talks?
SPEAKER_00Let's move into the tariff part, the juicy part this week as well.
SPEAKER_01All right. So, what what's new? What is what do our listeners need to be aware of? What's going on with the tariffs?
SPEAKER_00Well, first of all, I would sincerely hope that many of our listeners have already been following the news over the past week because a lot has happened. Um let's try to summarize it very briefly. Reciprocal tariffs are back on, except they're not reciprocal at all. First of all, as I think many are aware, they were not reciprocal back in April when they were first launched. That was just a formula linking that directly to the trade balance. The new implementation of them doesn't even have a formula anymore for many of the different countries. For some, it appears to be linked to the so-called trade deals. For some, it appears to be somewhat random, like the extremely high tariff suddenly on Switzerland. For some, it is not linked to trade at all. And good case example is Brazil, which now has a 50% tariff, not related to trade at all, but related to Trump's political disapproval of the court case against former President Bolsonaro in Brazil. So any notion that these are reciprocal are completely out the window and they're basically all over the place. That's one thing. However, there is another development I think is much more important to also note, because this increases uncertainty in the market. And that is the penalty tariffs that is now levied upon India. In terms of the so-called reciprocals, India is facing 25% tariffs here from August 8th, like all the other reciprocal tariffs. But more importantly, India gets another 25% from August 27th. So India gets to 50%. Why is India getting a penalty? Well, they're getting a penalty because they are buying Russian oil. And this is where the real juicy part and the important part for shippers lies, because there are two elements. First of all, India is not the only country buying Russian oil. They're not even the largest. The largest buyer of Russian oil is China. The largest buyer of Russian gas is the EU. The largest buyer of Russian petroleum products is Turkey. The fifth largest buyer in the world of Russian energy products is Brazil. So if the argumentation is that India is getting penalty tariffs because they are buying oil from Russia, that would suddenly also pin the crosshairs on China, EU, on Brazil, and if you go a step further down, South Korea, Singapore, and a host of other countries. So that's the first thing shippers should note. If you think the reciprocal tariffs is the end, that might actually not be the case at all. Then there is one on timing. And now it really now every I would urge everybody to really pay attention because I'm gonna throw dates at you like you're gonna be confused like never before. For the reciprocal tariffs, they come into effect on August 8th. However, if you load your cargo prior to that date, you have a grace period until October 5th to get it into the US. That makes sense. I load my cargo, say on August 6th, but it takes time to get to the US. Now, a grace period until October 5th, that's fine for basically all cargo unless something really bad happens, it will be able to make it on ships and get into the US prior to that date. Now come the Indian tariffs, the penalty tariffs. They come into effect on August 27th. So if you load before August 27th, you also have a grace period. But this is where the interesting bit is. That grace period is only until September 17th. That is a very short period. The usual transit time if you load cargo in India on a direct service to US East Coast is beyond a month. In very real terms, this would mean there is potentially cargo that was loaded on ships in India to the US before there ever was a penalty tariff on India. Yet the US importers will now have to pay that penalty tariff because they will be unable to get the cargo into the US prior to the September deadline. That is a new development that the grace period is suddenly so short. This is why the uncertainty for US importers have now been ratcheted up yet another notch. You wouldn't think that was important that was possible, but yet here we are. We are now in a situation where US importers are literally facing a situation where they might be liable to pay an import tariff that simply didn't exist and was unannounced at the time when they loaded the cargo. That is a major new uncertainty. As an importer, that is yet another argument to simply do the wait and see and not to front load any cargo to the extent possible because now suddenly you might be faced with additional tariffs that you don't even know at the time you are loading. This is a major uncertainty and a major problem for US importers.
SPEAKER_01Do you think there's going to be pushback from importers on specifically the Indian tariff and the timing of it?
SPEAKER_00Well, I'm not sure how much pushback they can necessarily do. I'm sure most US importers have tried to push back on the US government as much as they could ever since uh the whole trade war began. There's been no shortage of not only economists but also importers making it very, very clear what these tariffs are going to do to especially prices in the US. This is just uh another step. And all of this is before we talk about the elephant in the room. China. We are recording this one here on Monday the 11th, right? Tomorrow is a deadline. Failure to get a trade deal between US and China tomorrow basically means that the reciprocals come back on. Now, if you look at the baseline of it right now, if you're importing from China during the pause, it's not really a pause. You still get 10% reciprocal tariffs, you still get 20% in the so-called fentanyl tariffs, and for a number of specific commodities, you also have additional tariffs on top. That's the reality today. If there is no trade deal, the 10% reciprocals go back up to 34%. That is where the reciprocal originally was as well. But if we think back to what happened in April, the moment the US ratcheted this up to 34%, China retaliated. Will China retaliate this time? Of course, we don't know. I think a good guess would be, of course, they would. Because why wouldn't they? When we look at the development that transpired during April-May, every time the US ratcheted up the tariffs, the China simply followed suit until this reached a completely unsustainable level, where US tariffs on China was 145% and China tariffs on US was 125%. And this led to the pause. I mean, 125% import tariff on US goods to China would effectively kill off a lot of the US agricultural exporters as an example. So back to the starting point, tomorrow is the deadline. Failure to have a deal tomorrow, we might be facing this vicious cycle once more. We'll have to wait to tomorrow to see what happens. So for the shippers out there, it's simply a matter of probably wait and see and making a guessing game out of what the US will and will not do. I'm not sure is useful for anybody. I think anybody's guess right now in terms of what transpires in US trade policy is as good as anybody else's.
SPEAKER_01Well, and do you think that we're likely to add on that Russia fuel percentage as well, if we've seen that with some of these other countries, like for India?
SPEAKER_00That is that that is a good question. It probably shouldn't be ruled out. Trump has definitely threatened to do something over recent weeks, so it doesn't come as a surprise that he does it. The only thing that potentially here is surprising is he has chosen to selectively target only India. He has for weeks and weeks been threatening Russia that if they didn't make a peace agreement with Ukraine, he would do exactly this. But now he is applying that threat selectively only to India, not to the other major buyers of uh Russian energy products. So if Trump is selective right now in who is targeting, who is to say whether he will continue to selectively just pick out a few countries or whether he will be systematic, that is completely unknown as well. And maybe we'll have to wait until uh Trump has had his meeting with Putin up in Alaska to see how this one lands. Yeah.
SPEAKER_01Okay. Well, I know I will for sure be keeping an eye on your LinkedIn profile for the update tomorrow, as I'm sure you'll be making a post about the tariff rates as soon as you have access to it. Anything else you want to add about the tariffs here? I think we've covered kind of the latest that's occurred in the last week or so.
SPEAKER_00Yeah, I mean this this all transpired in the last week. Of course, one of the large open question marks here is the so-called deal between US and the EU. There is still major discrepancies in the uh fact sheets that came out of the US and the EU in terms of what the deal involved and what it didn't involve. And what we have seen over the last week is unsurprisingly that Trump is continuing to state that he will increase tariffs dramatically on pharmaceuticals coming into the US. And we have also seen over the last week Trump repeatedly state that he's going to ratchet up tariffs dramatically on pharmaceutical imports, which again is unsurprising. That has been his position all along from a value perspective. Pharmaceuticals is one of the largest imports into the US, especially from the EU, whereas from a container volume perspective, it is somewhat less important.
SPEAKER_01Um all right. Well, we will provide updates next week, as always. One other deadline that I think we should talk about is the USTR, a deadline that's coming up in October and some of the impacts we're starting to see there.
SPEAKER_00Yes. Um, the expectation is, of course, that most carriers will try their level best to reshuffle some of their ship deployments such that Chinese built ships would increasingly be used in non-US trades and vice versa, to the degree that's possible. The major issue would then, of course, be with Costco and double OCO. Because as Chinese carriers, every single vessel will be subject to a fee no matter where they're from, and the fees that they're going to pay is larger than the fees paid by the other carriers. So this presents an issue for Costco and double OCO. The expectation should be that Ocean Alliance might try to reshuffle some of their Pacific services. And we just saw OCL announce a new service directly from China to Mexico. And I think we should expect some more moves in that direction. Because China to Mexico without calling California would be avoiding all USTR fees. We could also expect China to Pacific Northwest services to potentially drop some of their vessel calls in Seattle or Tacoma.
SPEAKER_01All right. Well, that's some interesting stuff regarding USTR. I think we'll learn more over the coming weeks, but interesting to see how these announcements are already starting to come out. Well, we will continue conversations next week. Thank you for listening to today's episode. Please subscribe to us wherever you listen to your podcast, Apple Music, Spotify. We're also on YouTube. And uh stay tuned for our next episode next week.