Episode Transcript
[00:00:00] Speaker A: Hello and welcome to the Lodestar podcast. I'm your host, Charlotte Goldstone. In this episode, I'm going to be joined once again by head of research at freightos Judah Levine to deep dive into the current rate trends across air and sea. We're going to be discussing what's driving movements across the major lanes and assessing the impact of external factors, plus how seasonality has been shifting. Judah will also share his outlook for the rest of the year, including when the current Trans Pacific peak could ease and what to Expect from potential Q4 air freight peak. And he's also going to give us some advice on how shippers should be approaching their contracts. Let's get straight into the episode.
Judah, hello and welcome to the Lodestar podcast. It's great to have you here.
[00:00:48] Speaker B: Hi, thanks for having me.
[00:00:50] Speaker A: So let's start by taking a look at ocean freight. Are you able to first give us an indication of where we're currently at with rates globally on the major lanes and how this has changed across the recent months?
[00:01:00] Speaker B: Yeah, so I think we actually need to go back a little bit further, like to the start of the year. So, you know, with the outbreak of the war, we started to see rates on the Trans Pacific gradually increase between, you know, the war started at the end of February.
Up until the middle of May, we had rates increase about a thousand dollars per container on those lanes. Asia Europe rates didn't really increase, but they stayed about level they were, which was kind of elevated because we were still kind of in the Lunar New Year period when the US Eden War broke out. Since then though, starting in late May and certainly by early June, we started to see rates spike and they continued to really climb significantly up until early July across these major east west lanes. So on the Trans Pacific rates climbed by $4,000 per FDU up to about 7570 $600 to the west coast and 9,000 to the east Coast. Europe for Asia to North Europe. Mediterranean rates increased about $3,000 in that pretty short span up to about $6,000 to North Europe and 7,000 to the Mediterranean. Since then though, we started to see Asia Europe rates come down by about $1,000 per feu to North Europe and 2,000 to Mediterranean. They're both now at about $5,000 per per feu. Trans Pacific we had west coast rates dip about $1,000 and then rebound and east coast rates have stayed at about that peak level. So that's where we're at right now, you know, about the 7,600 level for West coast and 9,000 to the east coast.
[00:02:25] Speaker A: And would you say that rates on the whole are kind of mainly being influenced by supply and demand as is regular, or is it the kind of external factors that we've seen this year such as the war and the tariffs, all the geopolitics that we've been seeing?
[00:02:36] Speaker B: Yeah, so I think to a certain extent it's really all of the above. So there are certainly demand swings. Some of the timing of those demand swings are triggered by external events. And we have some supply issues kind of thrown in for good measure as well. So if we start with the external factors. So we talked about the war breaking out at the end of February. We know that the closure of the Strait of Hormuz put a lot of pressure on bunker, you know, on crude oil, but certainly on bunker fuel prices as well. And so that was a direct impact. So we said that for the Trans Pacific, rates raised, you know, climbed by a thousand dollars. For Asia, Europe they stayed level. So that was kind of a direct external impact through fuel prices. But now that's really more of a, of a baseline of the floor where rates are going to be. That's what fuel costs are, are contributing. Right now if we talk about the big drivers right now, the biggest one is demand. So as we said, rates started climbing in late May, certainly by early June. That's early for peak season. Right. So for for Asia, Europe it's even usually, you know, later. With Red Sea it's been earlier the last few years. But really peak season usually doesn't kick in until July. You'll have your peak in, you know, late August, early September. So starting in early June was a really early start. And that was for a few reasons. This was really, you know, front loading and driven by this external factor, by the straight of Hormuz, by higher costs kind of across industries and certainly for shipping. So the first one was Q3 BAF adjustments. So big shippers weren't really paying those higher fuel costs just yet, or a lot of them, or maybe not the full extent of the pass through because they have their fuel costs adjusted on a quarterly basis. So those higher costs were coming in Q3 you start to have a pull forward of demand before July.
The other was manufacturer prices. A lot of manufacturers also have their adjust their prices quarterly. Those were going to increase in July as well. Um, so that was kind of a cross lanes. And then for the Trans Pacific you also had tariffs. There was the section 122 tariff deadline. It was this 10% global tariffs were going to expire at the end of July. And there was concern it was going to be replaced by higher tariffs and there, so there was front loading there as well. Rates that are falling now kind of makes sense. We had an early start to peak season, we have an early end of peak season. That's what we're seeing for Asia, Europe, Trans Pacific, as we said, really surprisingly, and I was surprised, really, we see that rates have kind of stayed elevated. They kind of went down and back up for the west coast. And you know, why is that happening? Not entirely sure, but I think it could be related to those tariffs.
[00:05:15] Speaker A: Right.
[00:05:15] Speaker B: We had 10% expiring at the end of July. They were replaced by other tariffs by section 301 tariffs related to forced labor manufacturing. But those were at 10% to 12 and a half percent level. So they basically stayed the same. So there may be some shippers who are saying, you know, oh my prices haven't gone up, I'm going to continue ship, I'm going to continue my ordering. Or others are saying, you know, I pulled forward what I expected for peak season, but now tariffs are staying where they were. There might be additional tariffs coming soon and there are additional 301 investigations underway. So maybe we might be seeing some of that front loading as well. And then finally there are supply issues. You know, there's been serious congestion from three, you know, consecutive typhoons in the Far east that has shut down ports more than once, including Shanghai, including Shenzhen, even as far north as Beijing. There's also a drought in the, in the Rhine that's putting pressure and congestion in some of the North Europe ports. So that's been a factor to rates as well. It's possible that Asia, Europe, you know, demand is cooling, but rates are still 60% higher than they were Asia, North Europe than in May right before peak season demand started. So if demand has really dropped, rates may be higher than they otherwise would have been because of this congestion kind of absorbing capacity.
[00:06:28] Speaker A: I think it's really interesting that these kind of external shocks are increasingly influencing people's demand decisions because I mean, already this year, as you just mentioned, we're having these extreme weather events. There's the tariffs, there's the war, there's so much going on. And so front loading definitely is what people are doing. You mentioned we're kind of in the midst of a Trans Pacific peak season at the moment with, with rates kind of peaking. Do you have any indication of when that's going to start to die down?
[00:06:51] Speaker B: That's a good question. You know, through the latest rates in our freighter spotic index yesterday, we don't see rates, you know, starting to subside. And National Retail Federation gives projections for volumes, U.S. ocean import volumes for the coming months. And they kind of saw September arrivals being about even with August and then starting to see some come down in, in October. So in terms of bookings, in terms of spot rates, that would mean that we're probably still in that, in that peak level and that might continue into early September if those projections are correct. But, but if this is kind of front loading because global tariffs are at 10%, this might continue to be higher volumes than we otherwise would have expected until there's a clear sense of what tariffs are going to be and when they're going to change.
[00:07:38] Speaker A: So you said they're going to maybe die down perhaps in October time. Is that not just before golden week? Is that not when they're supposed to pick up again?
[00:07:44] Speaker B: Right. So usually there's a kind of increased demand just before Golden Week, the first week in October and then some catching up for those who didn't just after. But you know, we might see that. We might because of the front loading, we have inventories where shippers want them. So it's a good question, but I'm not sure the answer.
[00:08:00] Speaker A: Right. So in light of all of this and what you're seeing on the freighters terminal, what are you kind of recommending at the moment that shippers do in terms of contracting and what patterns are you seeing?
[00:08:08] Speaker B: Yeah, so there's definitely been a trend towards more what we call in our procure solution, rate refresh or mini tenders because of the volatility. And really, you know what, what shippers or Fords are looking for is kind of, you know, predictability and understanding where rates are going to be and when. And unfortunately we had a lot of volatility in the last few years. That doesn't make that entirely possible.
I do think that still long term contracts are the dominant mode, especially for big shippers and forwarders as well.
But we've seen different behavior at different times of the year because of different things going on and what spot rates are doing. So you know, Asia, Europe, those annual contracts are usually finalized at the end of the year and towards the end of last year, kind of the big story, this was before the war was overcapacity, that carriers are going to have to contend with overcapacity. And you saw some shippers being hesitant to kind of lock in rates that might drop further. And similarly when the war broke out, you had some Trans Pacific shippers that would normally finalize around May, you know, not seeing all those contracts that normally have been signed signed because they're afraid of, you know, locking in higher rates than, than what the market might do if the war were short lived, whatever. So it's hard to say what everyone's doing or what their recommended coursework because there's a lot of different approaches.
One factor that's kind of a long standing factor overall in the industry in terms of long term contracts is kind of complications when the spot market changes in, in really significant ways. So if you've locked in an annual rate as a shipper and suddenly spot rates go extremely high, you're going to start to pay surcharges or you're going to get your containers rolled for spot containers that are now much more lucrative to, to carriers and vice versa. If you have a contract rate as a shipper and rates the spot market goes below your contract rate, you might just, you know, no show on your, on your quantities, on your volumes and move to the spot market. So this is an ongoing kind of complication and we've been talking for a few years about index linked contracts. So the freight of spot decks can be used as a basis for index linking and that, you know, it doesn't have to be a one to one movement with what the spot market is doing, but it allows your rates to kind of shift so that that incentive in terms of higher costs or you know, or lower costs or higher rates or lower rates is removed in terms of what the impact will be operationally Even if you know your rates will change but you know, default. In the setup we have now, oftentimes you're paying different than your contract as well. It does expose you to those fluctuations, but there's also the ability to kind of hedge those fluctuations through derivatives based on the same contract. And we're seeing more of that taking place in the industry, but it's still kind of in, in development. Although it does solve some of the problems that we're talking about now in terms of contracting strategies.
[00:10:59] Speaker A: It all sounds quite complex. I'm glad I'm reporting on it and not actually trying to do any contracting myself.
We finish the episode. I wanted to ask you about the air freight side of things as well. So could you first of all give us a kind of indication of where we're at with rates on the major lanes on the air freight side of things?
[00:11:14] Speaker B: Yeah. So we've had big changes in air rates this year as well. We see rates right now ranging from like 20%, as much as 70% higher than they were earlier in the year, really before the war. And this is on again focusing on those major east west lanes. The basic trend had been big increases just with the start of the war on most lanes increasing by, you know, two to three dollars per kilo earlier in the year, peaking around April or May, and then easing since then, but still, as we said, quite elevated compared to the start of the year or compared to where they were last year. To give some examples, from the Far east in China to the U.S. rates right now are about $6.50 per kilo. Far east to Europe is at $4.50. Now there was, that was up to a peak of $5.30 in April, but it's compared to $3.50 which was the baseline. So about a, you know, a dollar more than 25% higher than it was year on year. Southeast Asia to North America and Europe started at, you know, $4 to, to North America and $2.50 to Europe. That's up to $3 per kilo on both these lanes now 7 and above $5. And now that's come down to about $2 higher. So that general trend was a big spike earlier, some easing and then kind of a leveling off on most lanes, with the exception of Southeast Asia to North America, which has just seen kind of a steady increase now up $3, you know, about 75% higher than it was at the start of the year.
[00:12:41] Speaker A: So again, I want to ask you a similar question, as I did with the ocean freight. How much of this movement is being influenced by just normal supply and demand, normal seasonality, and how much of it is being impacted by the external shocks we're seeing, like the removal of de minimis in the EU or the recent typhoon.
[00:12:55] Speaker B: I would say that for air cargo, it's more external.
So mostly external, but also some supply issues may be driven by external factors, but also demand issues on some lane. So if we start with external, you know, we start with the war in Iran. The price of jet fuel had increased, you know, very, very sharply in the, in the period just after the year had started to come down and eased really through June into July when there was this hope of the, of the ceasefire, but started to climb again.
Rates are, you know, about 50% higher than they were at the, at the baseline of, of pre war. So that was a big one. I think probably the dominant factor in air cargo rates right now. But we also had impacts on capacity. You know, the Gulf carriers, Emirates in Qatar are major providers of capacity, big source of capacity for connections between east and west, especially from South Asia to Europe. And those, you know, that capacity took a big hit and therefore volumes took a big hit earlier in the year. And we're still seeing kind of the recovery from their volumes, not so much. If we look at IATA year to date, global volumes have increased 5% through June and we're up year on year. Capacity is also up compared to last year in June, but isn't back to the level it was just before the war. So that's still places where they're recovering. But we also had more kind of internal to the market demand trends that are also factors to what's going on in air cargo, including rates.
The first one you mentioned, you know, the change in de minimis. And so you know, we know that about a year ago or more than a year ago, the U.S. suspended its diminimous exemption to start July. The EU canceled its DE minimis exemption. And there are signs, data from a world ACD shows that, you know, a double digit percent drop in volumes from Hong Kong and China to Europe in July and that reflects this drop in E commerce de minimis was a big factor facilitating the movement of low value goods by high value air transport. And without that we're seeing, you know, a big, a big shift like we did in the US but in terms of rates, as we said, you know, rates have come down. It hasn't behaved a lot differently than some of the other lanes. And I think that's because carriers have gotten really good at shifting capacity where it needs to go. So if there's a big drop in volumes on one lane, they're moving capacity to other lanes, either distributing it or moving it to where there's another increase in volumes. And that's the last demand trend that I wanted to mention, which is AI. So there's this big surge in investment in data centers and that requires a lot of high value hardware and different components and that's become the big drivers. You know, in the last few years we've been talking about E Commerce, all the freighters that it's keeping full every day. And you know, that's kind of changed because of external factors, right? Because of policy changes. And now we're seeing this really big surge in demand through this, you know, AI driven hardware sector which to seemingly, you know, a good extent is kind of replacing E commerce as, you know, not seeing a drop in volumes and driving growth even. So according to Trade and Transport group data and the, the big concentration of These volumes are on the Trans Pacific, right from the Far east and Southeast Asia to, to the US So they see these hardware imports at a new high, mostly coming from Taiwan, but also from Thailand and Vietnam. And data center hardware they estimate Is accounts for 17% of transpacific volumes compared to only 6% in 2024. So first of all, you have that significant growth, but secondly, you see it's, it's a big chunk of what's moving by air now. And that's been the driver of, you know, we talked about in general, rates increased with the start of the war, came down a little bit as fuel prices came down and capacity recovered and then kind of leveled off. China to Far east to the US has, you know, been volatile, but hasn't moved in the same pattern. And Southeast Asia to the US has just gradually kept climbing and kept climbing. I think those exceptions kind of reflected this shift in where demand is coming from and what. And what segment.
[00:17:07] Speaker A: Yeah, the AI boom is something that we've been covering quite a lot in air freight. But it's interesting that you mentioned that air is kind of a lot more susceptible to these external shocks such as the war, I think is the main one with the fuel prices. But how is this changing seasonality? I mean, looking forward to the rest of the year? What are you expecting in terms of the regular Q4 Peak and what you, what are you suggesting that shippers do for the rest of the year in terms of contracting with air freight?
[00:17:31] Speaker B: So I don't think there's any reason to think there's not going to be a Q4 air cargo peak season like there usually is.
I think what we've seen, volume growth, you know, global volume growth throughout the year shows that there is continuing demand and that AI is taking up a big chunk of it. So, you know, I would expect that we will see the seasonal surge in the types of goods that normally move by air. But that's on top of the continued growth and already really significant volumes coming from these other segments. E Commerce is still there, right? It's not as significant as it was, but it's certainly still there. But now we have AI hardware as well. So I think there will be a peak season and I think it will be fairly competitive in terms of pricing and pushing spot rates up because there's all this capacity being dedicated to these specific segments. So in terms of contracting, no, it's a little bit more complicated or diverse. In air cargo, there are, you know, fixed price contracts, there are block space agreements, and they each have their different.
Different characteristics. There's somewhat more, kind of shorter term contracts, three to six month contracts. So we might start seeing more of those being, you know, worked out right now as we get closer to Q4. What we might see is kind of an increase in block space agreements where, you know, the, the forwarder has, you know, blocked off this space that they are, is reserved for them and their volumes. Whether they show or not, they've kind of paid for those volumes as opposed to most of the, of the other contracts. And we might see more of that because of this, you know, expectation of pressure, because AI is taking up so much capacity that there's less available to everybody else. But it remains to be seen. I would expect that we see upward pressure on rates, you know, in a seasonal pattern. And that's starting from an already elevated floor for all the other reasons we already mentioned.
[00:19:28] Speaker A: Judah, thank you so much for your help this episode. I feel like I've thrown a lot at you and I have no idea how you remember all those numbers. I really appreciate your help.
[00:19:35] Speaker B: My pleasure. Thanks so much for having me.
[00:19:37] Speaker A: See you later.
