Container Bytes #38: The Sovereign Chokepoint and the July 1st BAF Reset

Welcome back to Container Bytes! I’m Julia Frohwein, joined as always by our resident freight expert, Judah Levine. 📍 It’s July 1st, and while it feels a bit like a broken record to talk about the Strait of Hormuz, the dynamics on the water have shifted completely. We are no longer looking at a standard blockade—we are witnessing a raw power struggle over who runs the waterway.

In this episode, we break down why Iran is using the current memorandum of understanding to enforce permanent sovereignty over the passage. They are ordering all ships to detour exclusively through their northern coastal lane. Meanwhile, a high-stakes UN evacuation effort by the International Maritime Organization (IMO) along the southern coast of Oman has been abruptly paused after an Evergreen container vessel was targeted by gunfire. This has left carriers stranded back in "stop-and-start" limbo, relying heavily on land-bridge bypasses through the UAE.

We also dive into the massive July 1st BAF Reset. Bunker fuel prices actually dropped in June, but contract shippers are getting hammered anyway. Because contract Bunker Adjustment Factors (BAFs) are adjusted quarterly based on retrospective carrier costs, the peak wartime energy bills from Q2 are officially hitting invoices today. Combined with factory price increases and the looming July 24th Section 122 tariff expiration, this triple threat has triggered an intense front-loading wave that has doubled Transpacific West Coast rates to over $6,000/FEU.

Chapters: 

• 00:00:00 — Broken Record: The July 1st landscape and the Hormuz reality. 
• 00:01:00 — Sovereign Squeeze: Iran’s new northern transit lane rules. 
• 00:01:45 — The Evergreen Incident: Why the IMO just paused its Oman evacuation channel. 
• 00:02:45 — The Land-Bridge Default: Keeping UAE connections alive amid the chaos. 
• 00:03:30 — The Q3 BAF Trigger: Contract holders pay for Q2's war bills today. 
• 00:05:00 — Peak Front-Loading: Why the NRF says the peak hit in June. 
• 00:06:45 — The July 24th Tariff Wall: Scrambling ahead of Section 122's exit. 
• 00:07:30 — The July 1st GRI Wave: Will carriers make the new peak surcharges stick?

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. 

For more detailed weekly freight updates delivered straight to your inbox, check out our weekly freight email. Want the freshest freight data on demand? Hit up terminal.freightos.com.

Transcript

SPEAKER_01 0:00

Hi there and welcome to today's episode of Container Bites, your ten minute update on the latest in freight. I'm Julia Frowwine, as always joined by Judah Levine, our freight expert. Judah, how are you today? I'm good. How's it going?

SPEAKER_00 0:11

Yeah, I'm doing okay. Alright, let's get into it. I hate to say it, but let's start with the Strait of Hamous. Yes, it's July 1st. It feels like a bit of a broken record at this point, but what can we do? So there's a ceasefire, but there's also some periodic changes of fire. What's the latest there?

SPEAKER_02 0:27

Yeah, so there's still this ceasefire that was signed or agreed upon early in uh June. Um but we've had instances of attacks on vessels and retaliations from the US and back and forth. There was more just this early this week. And basically what we're seeing is kind of a power struggle, not over whether the strait is kept open or not, but who's in charge. So Iran has made it clear that even through the memorandum of understanding, they understand that they're going to have sovereignty over the waterway, even though you know they hadn't had sovereignty before the war. And by international law, it seems like there should be kind of free passage that isn't isn't sovereign to any nation, at least, you know, through what was the main channel. But what we're seeing now is Iran basically saying to all vessels in the region, if you want to pass, you have to kind of coordinate with uh with this authority that they set up and follow their instructions and follow the path or the lane that they have set up, which is the northern kind of channel just along the coast of Iran. There's another safe or secure channel at the moment, which is the Southern Channel around the coast of Oman. And on that channel we had the IMO, which is the International Maritime Organization, the UN entity that was orchestrating kind of an organized evacuation or transits in and out, mostly out of the of the Persian Gulf through this other channel. Um but just this week there was attacks, it was attacked actually on a container vessel and an evergreen vessel that wasn't transiting through the Iranian one. It wasn't exactly in the IMO one. And so the IMO has paused that effort. And negotiations now, whether they're starting or stopping, is very unclear, are kind of focusing on that issue of what's going to happen in the strait. So all this has meant kind of a start, a stop and a start again of traffic through the strait. The traffic is at much higher levels than it was, you know, in May and the very beginning of January, you know, since the beginning of the war, but uh not anywhere near back to where it was, and the starting and stopping doesn't hurt. As I said, the traffic is mostly out and it's mostly oil tankers or oil or LNG tankers. Also some tankers uh entering, right? Because what the most uh kind of prioritized part is getting oil flows moving again. Um but again, with the uncertainty and with the lack of security in some areas, it's been you know not as smooth as was as was maybe expected.

SPEAKER_01 2:50

Okay, and do these constant forward back steps have any implications on the so for container traffic in the region, yes, right?

SPEAKER_02 2:57

So we saw one of the vessels that were hit was a container vessel, and the container ships are trying to exit, right? They've been stuck there for a very long time. So it does impact those. It also impacts if there is no stability and there isn't the ability to go in and out, you're not gonna see traffic back to uh the main ports in the Gulf, mostly in the UAE and Jibel Ali. And so you're gonna have to have those containers still going on these alternative routes, which are going to accessible ports and then continue on by land bridge. So from that perspective, it continues to be disruptive. As we've said before, that's a very small part of the overall container market. So operationally doesn't have the biggest impact. But as we've said also from the beginning, the the broad impact for the container market is on the cost of fuel. And the longer that it takes for uh crude flows to rebound to normal, the longer it will take for refined products like bunker fuel and jet fuel to go back to normal. Although we do continue to see um fuel costs easing from where they were, certainly much earlier in the war, and definitely even in June, we're seeing prices drop pretty significantly.

SPEAKER_01 4:01

Okay, and the cost of oil is also a driver of what's going on with freight rates and the early peak season. Can you talk a bit about that?

SPEAKER_02 4:08

Yeah, so not exactly directly, right? So it's not that fuel costs are pushing rates up to where they are right now. That is really demand-driven at the moment. So we're seeing a peak season that started earlier, really already by mid-May, has been really strong through June, and we'll, you know, to we'll see what happens into July. For the last week, rates were more or less stable, but they've increased really significantly since the middle of May. So uh Trans-Pacific rates to the West Coast are above six thousand dollars. That's a 120% increase, so more than doubled since mid-May. $8,000 to the East Coast, which is 85% higher than it was um six weeks ago. And that's true on Asia Europe as well. Asia Europe were also about level last week, but like Trans-Pacific, they increase a little bit in mid-May, and then big jump June 1st, big jump June 15th. So we have Asia Europe rates that are almost $5,000 per container, which is up 70% in that span, and Mediterranean prices that are $6,500, which is up 85%. So there are multiple factors which are driving this, and some of them are related to the price of oil, but not to direct fuel cost components of freight rates right now. One is that I think as we've said before, some of the major shippers they have long-term contracts with ocean carriers, and their fuel costs get adjusted quarterly. So, whatever carriers paid in the previous quarter, that's what gets adjusted for shippers in the new quarter. We're about to enter Q3. Fuel costs were very high for carriers during Q2 because of the war. So those uh container rates are gonna start to increase for those shippers. And similarly for manufacturer prices, a lot of manufacturers have either been absorbing cost increases so far or also have kind of quarterly contracts with importers, and so those prices, those costs are gonna increase as well. So we're seeing front loading there. For US shippers, there may also be some component of front loading ahead of uh expiring tariffs. Section 122, this 10% global level uh tariff is going to expire July 24th, and the White House is taking steps to implement tariffs by other means, which may be higher than that 10% level for for many countries. So uh those are the issues pulling forward demand for now. Two of them are related to the to the cost of oil, and so they are kind of an impact of another impact of the war.

SPEAKER_01 6:21

Okay, and is there any expectations the demand is going to keep us keep going through July?

SPEAKER_02 6:25

So as we said, front loading, if you're front loading, that means you're pulling forward from when they would normally go. So if there are very strong volumes earlier, we can expect that they'll be weaker than otherwise would have been volumes later on. The question is how late? If we have these front loading motivations for a July 1st deadline, then it's feasible that we'll start to see volumes start to be past their peak. It's not to say that we'll see it, we'll see a collapse because we're still in what would normally be peak season, right? Not all shippers are having BAF increases or having realistic fuel increases now. And for the tariff component, right, there's still some time until those uh expire. Although if you were expecting to kind of receive those goods by then, it's about getting too late. So we'll see. The other component, though, is that there is growing congestion. So there had been congestion at some European hubs and some hubs in the Far East, um, even before this big surge. The surge is making it worse and causing congestion, which also helps to put upper pressure on race, but also causes delays. So there may be, you know, some shippers who are trying to beat those deadlines and now are not, but they already have these orders on the way, and that will keep volumes higher for a little longer. Carriers are planning to introduce GRIs right starting today, July 1st, and peak season surcharges for a lot of these lanes, some of them are very, very significant. Those are the announced levels, right? That doesn't necessarily mean that that's what free rates are actually going to do. They might vary briefly as those are introduced. So we'll really kind of see in the next couple weeks what rates are going to do. And depending on what rates are going to do, that will reflect where we are relative to peak season uh peak. There are some additional increases just now being announced for August, but again, carriers can or often do announce price increases that they don't necessarily implement or they don't necessarily implement to the level that they're that they have uh required to announce them before. So we'll have to wait and see. I would think that we probably will see rates increase to start July, as I haven't heard of kind of big drop-offs in bookings or in demand. But I would also think that certainly by the end of July, or maybe by mid July, we're already starting to see some easy.

SPEAKER_01 8:23

Right. So watch this space as always.

SPEAKER_02 8:24

That's why we get them to keep coming back.

SPEAKER_01 8:27

Exactly. All right, that's all we have time for. Thank you, Judah. If you enjoyed the session, please hit the subscribe button and you'll get notified about all our future updates. Thank you for listening and have a great day.