Episode #22: Strait to It, Creative Surcharges and Supreme Court Wins

Welcome back to the pod! 

This week, I (Eytan) and Judah (not me) dive into why the Straits of Hormuz is the latest headache for your bottom line, even if your containers aren't actually in the Gulf. We’re tracking "Emergency Contingency Surcharges" (top-tier naming, guys) that are adding $300-$400 per container just as we hit the post-Lunar New Year lull.

On the bright side, the Supreme Court and the Court of International Trade just handed a massive win to importers. If you’ve been paying IEEPA tariffs, you’re officially in the "refund" line...though Customs and Border Protection claims it might take a few lifetimes to process.

Share this episode or your next shipment will be hit with a "Forgot to Tell My Friends Surcharge" that is legally binding in at least three oceans.

Chapters

00:00:00 — The "War Card" and why we missed a week.

00:01:15 — The Straits of Hormuz: Why 2% of volume is causing 100% of the drama.

00:03:30 — Creative Surcharges: Emergency, Contingency, and everything in between.

00:06:45 — Air Cargo update: Emirates, Qatar, and the "Safe Corridors."

00:09:40 — Tariff Refunds: The IEEPA ruling and the $150 per TEU fuel hike.

This podcast is a little experiment from Freightos—and may not be around forever—so if you dig quick bites of freight wisdom, let us know. 

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Transcript

SPEAKER_00 0:02

And we are back with another episode of Container Bites. I know what you're thinking. We did miss last week. I am pulling the war card on that. And we will definitely touch on that today. Hey Jito, good to see you.

SPEAKER_01 0:16

Good to see you. Thanks for having me on.

SPEAKER_00 0:18

Thanks for having me on. Let's get started with like where it's hot. Straits of Hormuz, you know, we were talking for probably months about Straits of Hormuz closing and what that means. Mostly, right, we talked a lot about it mostly for oil prices. What are the impacts so far on ocean freight?

SPEAKER_01 0:35

Yeah, so as you said, it's a much more important waterway for oil than for containers. Only about two to three percent of global volumes normally go through the Strait of Hormuz. Uh, but that's not a consolation if you're a shipper on that lane. And you know, very quickly, new bookings were were suspended that left a lot of containers uh already on yards where they were. Um but containers en route, this has been a big disruption. So there's been divergence to other alternate ports in the region. There are some uh ports for in the UAE, kind of on the eastern side of the strait that are still accessible, ports in Oman. Uh Gemini is has developed a new route to um Saudi Arabia in the northern Red Sea, basically going around the Cape of Good Hope and going all the way into uh the northern uh Red Sea without passing by uh Yemen. Um so there are alternate routes, and containers will go on by by road from there, but certainly, certainly um uh disruptions for those shippers. We're also seeing congestion in some of the trades that are directly trade significantly with um with the Gulf states, like in India and Bangladesh. So you see containers building up there that are meant to export to those countries, and we're starting to see some increased volumes at some of the Far East transship hubs, right? So some of those containers that were already in transit to the uh to the Gulf need to go elsewhere now, and some of those are going to be stored at kind of trans ship hubs like in Sri Lanka and Singapore. And that could start to impact non-Gulf shippers as well, if if congestion really builds up there. But so far, it doesn't look like it's too bad. And again, bookings have been have been suspended. So operationally, at least, it's really kind of limited to directly to those lanes for now.

SPEAKER_00 2:14

Yeah, and that was exactly what was kind of going through my head of like when when do we start seeing the spillover? We saw this a lot, you know, during COVID, where congestion in one place was starting to trickle down. Uh, if if we look at the hard numbers on the ocean freight side, what has this meant for container rates?

SPEAKER_01 2:30

Yeah, really? So for container rates on the main lanes, we saw rates go up by a couple hundred dollars per uh FU last week, which is about in line with seasonal trends, right? So we're just after lunar new year. There's generally some increased demand for a couple weeks. So I really don't think that rate increases on the main trades are reflective of anything going on with Iran. We saw very steep surcharges for again for those containers en route to the Gulf, like thousands of dollars per container, disruption surcharges, also uh charges to offload at um you know at other ports like angel dollars per container for some uh from some of the other carriers. Um but again, for the most part, those price increases for now have been limited to the to those directly impacted uh containers and not for the broader market. Just in the last couple of days, though, we started to see the announcement, carriers announcing surcharges for other lanes, right? So also for containers going to the Middle East, but not exactly to the Gulf states, but even for Asia Europe, on some carriers are are announcing uh surcharges or GRIs coming. So these aren't in place yet, but they'll be coming in the next few weeks. Um, and clearly, really quite significant. So this is really kind of what we're starting to see a knock-on effect in terms of in terms of uh rates. We're also seeing reports of pushback. So there are reports that um government agencies, both in India and in China, are meeting with carriers to try and you know see that rates don't go up uh too high, especially, and we think this is certainly relevant for uh other lanes that are really not directly connected. Um so we'll have to see in uh what happens there.

SPEAKER_00 4:05

What is the which specific surcharge? I'm always kind of impressed with uh creativity around the naming. Uh is it just a war risk surcharge or Middle East falling apart? Uh surcharge?

SPEAKER_01 4:17

There's a range. There's a range of names. Sometimes they're just calling them peak season surcharges, but it's usually uh emergency disruption surcharges or emergency contingency surcharge or things like that. So there's no shortage of names.

SPEAKER_00 4:30

And obviously, obviously, um oil costs are are spiking and and that'll play a direct a direct impact, right, into fuel uh prices. So so how do you see that um spilling out into freight costs?

SPEAKER_01 4:46

Yeah, so we talk about surcharges for other lanes, which you know there's been some some pushback and they're questionable of what the disruptions really are in terms of impacting those non-Gulf lanes, uh, but certainly the price of oil is a major component of uh carrier costs. So you've seen fuel costs go up for them, and they're gonna pass those on to uh to shippers. So we're already seeing announcements of uh emergency fuel surcharges from uh multiple carriers, CMA, CGM, Hapag Lloyd, they both announce them for about $150 per 20-foot containers, about $300 per container for long-haul voyages. This is starting March 23rd. They're not allowed to introduce emergency fuel surcharges immediately. Um are only announcing surcharges for certain lanes. Mersk is uh also announcing across all long haul lanes of $400 uh per container starting March 25th. So these are coming in the next in the next couple weeks. Carriers generally increase fuel charges on a quarterly basis. So we might see a series of of emergency surcharges and that would put it be put into place um in a few months for for for Q3 since Q2 is already set. But that's something that I think will definitely go through if the war stretches on, if the price of oil stays stays elevated. This is something that will increase freight rates as opposed to these other surcharges where there may be some pushback and doesn't mean they won't go through, but there may be less uh um you know, less amenable to accepting them from the shipper setting.

SPEAKER_00 6:13

And this is all hitting at a time when freight rates typically would be going down, right? And during the low between post-lunar new year and uh peak season.

SPEAKER_01 6:22

Yeah, for sure. And I think that's actually also one piece of it is that because this is happening during a lower demand period, we could expect the disruptions to be less uh impactful for the broader market because there's just going to be fewer volumes than if we were in a more um higher demand period.

SPEAKER_00 6:40

Right. And I mean, moving on to the air side, right? Gulf is the Gulf is a major hub for East-West air cargo, uh, you know, Emirates Qatar operating from there, and and of course, you know, a lot of airspace closures going on. What is happening operationally on the air cargo side?

SPEAKER_01 6:55

Yeah, so we're approaching, you know, over the weekend will be two weeks since the outbreak of the war. And as we know, um these countries in the Gulf have been targeted by missile and drone attacks. Um, and the airports specifically have been targeted, as have some of the ocean ports, at least uh Jabela Lee had a uh had a fire from something that that fell there. So the airspace was really um completely closed. Very few flights were going out uh initially. And as you said, um Emirates and Qatar are two of the three largest uh cargo carriers um in the market. Uh together, they're more than 10% of overall capacity. So it's been um it's been uh really significant. Over the last few days, though, in the UAE, they've opened kind of safe air corridors, and they're ascending like almost 50 flights an hour or are leaving the um uh the airport. Uh and Emirates has a long list of um destinations that now they're flying to. They're not flying their full number of flights. They're probably above 50% of their normal flights, but it's coming back online, and we're seeing reports of kind of improving situations in terms of getting um uh getting capacity. Etihad has started flying too. They're not as significant a player, they're not in the top 20. Qatar is still remains closed. So the in Qatar, the airspace is still completely closed. Um so that is still a significant kind of drain on capacity. At the same time, we see other carriers increasing long-haul capacity, right? So if a lot of Asia-Europe goods were going through the Gulf normally, now we're seeing more capacity going directly from Asia to Europe. So um, yeah, so we're kind of seeing adjustments there, and it was much more uh disruptive initially than what we're seeing in the last couple of days.

SPEAKER_00 8:38

And then I guess in in terms of again, the two questions we talked about before, are like what what about again the price of rising fuel and how is the air market being affected in terms of rates?

SPEAKER_01 8:48

Yeah, so for sure fuel costs will be a factor for air carriers as well. While the capacity was was really constrained, we did see air rates start to increase uh really significantly. We saw a rate surge about 50% from from South Asia to Europe and also to North America. Those rates are up to uh $4 and $6 per kilo, respectively. We saw a 20% increase from Southeast Asia to Europe, which went above $4 per kilo. These prices seem to be kind of slowing or leveling off and not coming down, and that might reflect some of this capacity being um put back into the market. But again, kind of what we're talking about in ocean, some of the biggest markets that are impacted are uh South Asia or Southeast Asia, especially India and places like that. A lot of their um goods heading west by air would go through really through uh Dubai often. And um, and so this is a big hit to them, meaning increased costs because they have to, you know, you go through China or go through, you know, um airports in Hong Kong or things like that. So it's uh increased costs, and we're seeing rates increase as well. But as we said, it seems to be trending towards improvement as some of the Gulf carriers are restoring their schedules.

SPEAKER_00 9:54

Of course, in the backdrop, there's the ongoing trade war that we've been talking about that has been taking up most of the energy until now. Uh what is new there? Does the US um administration still have time to be focusing on tariffs, or is it all in on the current war?

SPEAKER_01 10:13

Um seems like there's still time and there's new developments there as well. So, you know, as we know, the Supreme Court uh ruled that EPA tariffs were invalid. They ruled back in um uh in February 20th. Just this past week, though, we had the U.S. Court of International Trade that ruled or kind of ordered that the government has to start refunding EPA tariffs that are already paid. And there was some um you know speculation that this would take a lot of time until there was a decision. There have been you know thousands of lawsuits filed, and it's kind of been consolidated into just one. So even if you're if you're a business that hasn't filed a lawsuit, it seems that you'll be eligible to get a refund anyway, which is a big win for um for importers. Um, customs and border protection said they can't do that right away. They don't have the the means to do that, you know, to do it manually would take um you know, would take lifetimes. So they have to develop uh automated ways of doing this and say they are trying to do that within the next 45 days. Um, so it's a big step forward, but it doesn't mean that refunds are like immediately on the way. At the same time, we have these section uh 122 tariffs that are have a 10% global tariff in in place. And just this week the USTR said that Section 301 uh investigations, and this is the law, the the uh part of the trade law that allows country-specific tariffs, um, those are underway and they're gonna be ready by the end of July, meaning that they're gonna use these other more kind of labor-intensive to um uh to pass those, you know, to meet the criteria to put those into place, which is why they used EPA in the first place. They're saying these will be ready in time for July to basically replace um the EPA tariffs. But section 122 has also now been challenged by about uh 20 states um because 122 is based on a balance of payments, and it was really the law was put into place when the US was still in the gold standard. So there's questions about the basis for the use of that in the meantime as well, which means you know if shippers are paying tariffs on 122, maybe those will be refunded later on as well. Um uh yeah, so still uh a lot going on there.

SPEAKER_00 12:15

Oh wow. All right, and I mean this this is likely good news for historical uh uh cash flow for small businesses. Have you seen any changes kind of looking forward or or right now for for US imports? Like have we started to see bumps at least? Or is it or maybe it's just getting lost inside of the lunar new year or come back?

SPEAKER_01 12:36

Um right. So we're have been in the lunar new year period, so it's not really uh possible to get goods out. Now we're just posts, so we'll see what happens. If we look at um National Retail Federation, they do projections for U.S. Ocean imports, and they just came out with projections this week. If you compare those to uh their projections in February, which was before the uh Supreme Court decision, um, they're about the same. So at least based on that measure, it doesn't seem like there's gonna be a lot of front loading, even though at 10% it is quite a reduction for a lot of um, you know, for imports from quite a few countries, including China, the baseline was 20%. And the administration has said there's gonna be another Section 122 putting 15% tariffs, which is the the roof, the the ceiling for uh what section 122 can be used for for countries that had tariffs, you know, at 15% or higher. And China was on was at 20%. So that's a 10% percentage points different if you're importing from China. But so far it seems like there's just enough uh uncertainty and enough kind of caution by shippers that this isn't triggering some of the front loading like we saw last year.

SPEAKER_00 13:44

Awesome. All right. Well, we'll see how this uh evolves. Uh Juno, thank you very much.