The 2024 ocean cargo forecast: A tale of too many variables

We’ve been posting our 2024 modal market outlook series over the past several weeks. These predictions cover various transportation modes from a budget, service and industry perspective. We began with NTT DATA’s Kevin Zweier on trucking and its outsized impact on logistics budgets. Micheal McDonagh from AFS Logistics focused on carrier strategies amid the shifting policies of parcel freight. Now we conclude the series with John Westwood from Gemini Shippers and his forecast for the too-dynamic-at-the-moment ocean market.

Fortunately, we’re past the pandemic hangover

We’ve all experienced an extraordinary transformation of ocean cargo since 2020. The pandemic brought surging, unstable rates that set the industry on a new heading. But that course didn't last long — demand and rates dropped abruptly in 2023.

What disruptions are affecting the ocean market now?

Global events are disrupting international trade. Vessels transiting the Suez Canal and the Red Sea are often diverted due to attacks on commercial shipping. Conflicts in Ukraine, Russia, Israel and Gaza, as well as political tensions with China, Iran and North Korea, also contribute to increased risks. In response, retailers should build resilience and diversification through localized sourcing strategies and regionalization.

2024’s concerns aren’t so different from last year

The impact of low water levels in the Panama Canal and military conflicts mean the first half of 2024 is bound to be unpredictable. These could lead to vessel rerouting limitations and asset imbalances reminiscent of those during the early days of the pandemic.

Pricing pressures and responding to geopolitical risk

Carriers had been trying to increase their prices in the second half of 2023, but they’ve only recently been successful. These price increases are now possible as carriers now face additional costs from rerouting vessels headed toward Europe and the U.S. East Coast. Trips are longer, and alternate routes for East Coast shipments are causing the spread between East and West Coast rates to exceed the benchmark of $1,000. Furthermore, carriers reduced the percentage of accounts they handled on a contract basis, sending more cargo to the spot market.

Insurers and vessel owners closely monitor the situation and examine the limits of war-risk premiums. As a result, they may, for example, entirely avoid the Red Sea. Insurers are working to reduce risks with no definite solutions to these issues. Insurers will have more say in cargo owners’ activity if the Red Sea situation doesn't improve. The consensus: It's only a matter of time before tensions flare up. How much the industry will endure before conditions improve is anybody's guess.

The reality: It'll never be entirely over

Like the ongoing issue of Somali piracy, incidents may dwindle over time, but they’ll remain a threat. Carriers always claim that they protect their ships and crews. Yet, during the piracy crisis, they didn’t stop sailing through the dangerous Straits of Malacca in the 90s or the Gulf of Aden. We continued to use the Panama Canal during the 80s U.S. conflicts in the region. More to the point, dangerous cargo — liquid natural gas (LNG) tankers and ultra-large crude carriers (ULCCs) — continue to sail.

“With unpredictable global disruptions, strategic contingency planning is a must-have.”

Additional risks to watch for

As shipping companies reduce capacity, this will lead to a backlog of containers that will last through May as carriers negotiate better contract rates. There’s also a possibility that September’s International Longshoremen’s Association’s (ILA) contract negotiations will cause port slowdowns or strikes on the East Coast, adding volatility to supply and demand metrics. Complicating short-term matters are the sale of HMM and the break-up of the 2M Alliance between MSC and Maersk.

The recent push for zero-emission container shipping will become more intense. By 2030, it’s estimated that zero-emission ships will cost between US$30 and $70 per twenty-foot equivalent unit (TEU) on the Chinese coastal route and $90 to $450 per TEU on the transpacific route. While a positive development for reducing carbon emissions in the shipping industry, it also means that there will be additional costs for shippers.

For example, the EU Emissions Trading System (ETS) imposes taxes on carbon emissions, creating additional expenses. To avoid these, carriers may resort to evasion strategies. One approach is to call at non-European Union ports, which can reduce costs. However, this will result in longer transit times and reduced reliability due to more transshipments. Shippers will need to carefully consider the trade-offs between cost savings, service quality and the impact of environmental regulations when making these decisions.

Finally, in addition to the challenges posed by emissions protocols, there may also be delays for cargo bound for the interior of the United States. Specifically, cargo transported via the Inland Port Intermodal (IPI) system may experience delays of three weeks or more. These delays are a result of increased dwell times caused by railcar shortages on the West Coast. This could disrupt supply chains and require shippers to plan accordingly.

Benchmark and watch where rates go

There's a correlation between spot rates in December and ensuing contract renewal rates. The higher the spot rates in December and Lunar New Year, the more pressure there is to push contract rates up at the start of negotiations. However, we’ve recently seen spot rate reductions of between 20 and 40% in March — depending on the year — except for the 2020–2022 COVID-19 years. Since the 2008 financial crisis, there’s only been one year with a flat market.

New Contract Rates

What will rates be for the upcoming contract season, given the elevated spot rates we've seen to start 2024? Several factors are working together to support higher rates this year. However, there aren’t any signs of another significant demand increase like in 2021. Despite this, consumers are still purchasing goods and there's ongoing inventory restocking, so market demand is healthy. However, it’s unlikely that we’ll see a market frenzy as we did in 2021.

Contract rates will eventually decrease when there's more supply than demand ... and there will be. We may see some temporary hiding of ships, given the longer transits due to the Red Sea conflict. However, there's no reason for rates to remain high throughout the contract period unless other unforeseen circumstances, such as a renewed COVID-19 threat or any of the other factors discussed above, arise.

Being ready: What you can do

It’s crucial to take ownership of your supply chain and coordinate procurement of products and freight effectively. Give these strategies a try:

• The longer you wait out the market, the lower rates you can expect to receive. Initial bids may be more in line with spot rates and thus higher than current contract rates. However, spot rates are already starting to come down as the market settles. If you are “waiting things out,” remember to extend current contracts to avoid booking gaps. Focus on a three-pronged procurement approach involving direct contracts with ocean carriers, relationships with non-vessel operating common carriers (NVOCCs) and participating in shipper associations.
• Have backup routing and port options for major products. Consider a dual-path strategy using providers that go through the Panama Canal and others who use mini-land bridge (MLB) routing via the U.S. West Coast for East Coast cargo. You’ll need to book providers 2–3 weeks in advance. Be sure and stick to the number of boxes you're committed to — don’t bait-and-switch. Likewise, add 2–3-week buffers to transit times and budget for surcharges. Finally, choose stable routes and anticipate potential bottlenecks.

Contact us and see how NTT DATA Supply Chain Consulting's Transportation practice will make sure you’re prepared to take advantage of market conditions. Our top supply chain talent, enabled by proven, leading-edge digital assets — tools, methods and content — deliver actionable insights and measurable outcomes to some of today’s largest and most complex supply chains.