The Decisive | Season 3 Ep.13 - Hot Topics in Shipping and Supply Chains: Tariffs, Taxes and More

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Kristen Hallam:
You're listening to The Decisive Podcast—insights and analysis to empower confident decision-making. Welcome to The Decisive Podcast, brought to you by S&P Global Market Intelligence. I'm your host, Kristen Hallam.

In this episode, we're discussing highlights of the recent Transpacific Maritime (TPM) conference and looking ahead to the Breakbulk conference. Both TPM and Breakbulk are organized by the Journal of Commerce, and we have Mark Szakonyi, Executive Editor of the Journal of Commerce, with us today, along with Chris Rogers, Head of Supply Chain Research at S&P Global Market Intelligence.

We've got some tariff news coming in April, which is just around the corner as we're recording this. Chris, what are we watching for, and how might this impact supply chains for the rest of the year?

Chris Rogers:
Yeah. So we're gonna have a lot of tariff news not just in April, but on an ongoing basis as well. I think we can break it into three big areas.

First is this Fair and Reciprocal Plan. This is the toolkit by which President Trump wants to apply tariffs to most other countries in the world. That might be driven by their tariff rates—so if they're higher than the U.S.—or might also be driven by sales taxes. The Trump administration doesn't like value-added tax in Europe, for example.

The second area will be a bunch of specialist tariffs on particular sectors. We've already seen autos, pharmaceuticals, and semiconductors being targeted. There are also ongoing reviews of copper and lumber.

And then the third area is the ongoing kind of hangover of tariffs on Canada and Mexico, which haven't yet, as of when we're recording, been fully implemented. There are also a lot of other ad hoc measures. What we've been seeing and hearing from our customers—both at TPM and since—is that a lot of these tariffs will feed into pricing rather than necessarily causing an immediate shift in supply chains. If you don't know what the tariff outlook will be one, two, or three years down the line—which is how long it takes to reform your supply chain, find new suppliers, or locate new manufacturing facilities—then you'll just try and pass those costs on to your customers. So primarily, that's the main short-term impact we expect to see on supply chains.

Mark Szakonyi:
Yeah. And interestingly, it was reported that China actually called some of the big BCOs and said, Listen, you need to stop putting so much pressure on your suppliers—in the sense of the new procurement soundtracks—trying to push those additional costs back to the factories. So that's very, very sensitive.

But I definitely think Chris is spot on in terms of people just holding off. A lot of the advice that we heard at TPM was basically: Don't panic right now. You're only going to cause yourself more cost and headaches if you try to respond to every new market development.

Chris Rogers:
I would say, though, Mark, that we do want people to pay very close attention—to both what the Journal of Commerce is saying and what our researchers are analyzing.

But in all seriousness, it’s a great point about the international aspect. If goods aren't going to come to the U.S. because they become too expensive, they'll need to go elsewhere in the world. The first time around, under the former Trump administration, we saw that tariffs applied to China partly meant that Chinese goods went elsewhere in the world. And I guess that’s why, to a certain extent, the shipping industry can be a little bit relaxed about tariffs in the near term—because goods will just go somewhere else even if they don’t come to the United States.

Mark Szakonyi:
Yeah. We have heard from the carriers. I mean, for years, they've been expanding their networks into Southeast Asia and so on.

I would say, though, right now, we're in a very hold-and-see mode when I talk to U.S. importers and carriers. We haven't seen the volumes yet, but there's definitely a sense that things are a little bit softer. The decline in spot rates on the Transpacific suggests that there's some extra weakness. But it's too soon to know because everybody's kind of holding on, and we may see a rev-up in orders.

At the same time, I'm sure—as Chris can note—the consumer confidence indices are not pointing in the right direction.

Chris Rogers:
Yeah. Absolutely. Our most recent data is for February on U.S. inbound shipments, and on a days-adjusted basis—because there was a leap year last year—imports to the U.S. were actually up by 8% in February. That might be kind of a last gasp, getting across the line, but we've always got the weirdness around the timing of the Lunar New Year.

I think that the shift in shipping rates that we've seen, which Mark referred to, has been quite significant. If we look at the Commodity Insights, Platts figures for shipping rates, they've come down to around $900 per 20-foot equivalent unit of container freight from Asia into West Coast North America. Last July, they were just under $4,000. So we've seen quite a precipitous drop already.

Kristen Hallam:
And speaking of rates—Mark, TPM is typically a time for rate negotiations, right? How did the specter of tariffs and the uncertainty around them influence negotiations this time around?

Mark Szakonyi:
Well, I think it put a little bit of a pause. Some years, folks are finalizing their contracts at TPM, but that wasn’t the case this year. People are definitely looking at the spot rate weaknesses and seeing what they can get. At the same time, some of the carriers I'm talking to are being a little more conservative in terms of their Minimum Quantity Commitments (MQCs). They want to get a good floor like usual, but there’s also a sense that, yes, there’s overcapacity, yes, there are tariffs, but this market can come out of line really fast. There might be a play for higher spot rates in the second half. Obviously, a lot of that depends on the Red Sea.

Chris Rogers:
I think there's an interesting point about that more conservative approach to commitments. One of the things we were hearing—speaking to procurement managers at the conference and subsequently—is a desire to try to inoculate risk as much as possible. Some are asking for tariffs to be treated separately from the rest of a procurement conversation.

So, for example, I will buy widgets from you at X, excluding tariffs. If tariffs are there, we’ll decide. The importer is the one writing the check, but maybe they negotiate a rebate and pass some costs to customers. That way, they’re not trying to second-guess where tariffs might be in a few months.

Mark Szakonyi:
And there are volumes that must move, whether there’s tariff pressure or not. I was talking to some shippers last week, and they’re like, Back to school is happening. Folks will still buy supplies—maybe not as much, but they’ll buy them.

Chris Rogers:
Oh, don’t say peak season already, man.

Mark Szakonyi:
I just said back to school. I didn’t drop the P word yet.

Kristen Hallam:
One of the peak seasons, right?

Mark Szakonyi:
Right. One of the many. A mini peak.

Kristen Hallam:
Mark, you mentioned the Red Sea. Our outlook for shipping disruption there remains severe through 2025. If that outlook shifts and the Red Sea becomes a safer route for container ships, what would that look like for carriers?

Mark Szakonyi:
Well, it would—I mean, I guess—I think for the whole industry, it would look at least three to six months of congestion or disruption. It would most likely spill into congestion in Northern European ports, maybe to a lesser degree to some East Coast ports in North America.

In terms of the market dynamics, I mean, that's the thing that the carriers are pointing to and saying, "Hey, if this capacity comes out, that changes the whole equation, and we're going to be in a bigger overcapacity issue." I think there's a lot of truth to that, but at the same time, there are a lot of levers they can pull, whether it's slower steaming some of their vessels. They could potentially even idle, which they've really not done much. So there are still some options.

Another thing that we heard from TPM here is that even when we look over the last couple of years, the actual real functional capacity that's added is quite modest. I mean, you're looking at mid-single digits. Meaning that more and more of the capacity that's being deployed is spending more of its time outside of ports waiting than actually delivering goods. So that's basically reducing the effective capacity.

That's why one of the messages that we kind of definitely heard at TPM and underscoring was that we can't think of capacity and demand in the same way. Twenty years ago, you could look at the order book, you could look at the average volume, and you didn't need to be quite brilliant. You could just say, "Wow, there's going to be overcapacity. The carriers are going to start undercutting each other. Rates are going to get low, blah blah blah." Things are different now.

Chris Rogers:
I think on that as well, from a competitive perspective, one of the things we look after is the International Maritime Organization's numbering database. So we have a lot of information, as Mark alluded to, on new capacity coming into the system. And whilst, you know, in a given year, it might be 6 or 7%, we do have—excuse the pun—a bow wave of new capacity coming over the next three or four years.

Back of the envelope, Med Sea diversions take about 6% out of the global shipping network in terms of capacity of vessels going more slowly. Now, our forecast for growth in container operations this year globally is about 4%. So we've got a little bit of demand growth. We've got quite a bit more capacity growth coming through.

So to Mark's point, it comes down to the competitive dynamics amongst the shipping companies. Are they going to maintain the discipline that we've seen over the past couple of years? If we think back to 2016, the last time there was a lot of extra capacity coming and we had a drop in demand, it was, you know, a bit of a mess. Container rates collapsed. Clearly, the shipping companies had a lot of debt, and we actually had one company enter financial failure.

This time around, again, is different. Quite apart from anything else, the container lines don't have loads of debt this time around. So they haven't got the banks breathing down their necks saying, "You’ve got to make money at any cost." So that discipline thing, particularly in an environment where we're seeing a realignment in how the shipping industry organizes itself, is going to be really interesting to play out.

For us, you know, to a certain extent, you get a lot more boats around and not quite as much demand around. From an economic perspective, that suggests downward—not upward—pressure. But, you know, given the rates vary so wildly, one of the speakers at TPM made the point that shipping rates can virtually double or halve in no time at all on the basis of very small changes in network operation. That could work in both directions. You know, if discipline doesn't hold, then things could get a little bit messy quite quickly.

Kristen Hallam:
So pivoting to another hot topic from TPM—the proposed port tax on Chinese-owned or Chinese-built vessels. What were attendees saying about that? And, I mean, how are carriers and shippers preparing for that possibility, Mark?

Mark Szakonyi:
Well, initial impression was, "Wow, that's quite ambitious." But at the same time, even though it seems, for so many of us in the industry, the idea of restoring U.S. shipbuilding—particularly via tonnage tax—seems a hard line to see, the market nonetheless is preparing for it. And the response, I would say, is, you know, a couple of things.

First, the carriers have been very clear that it may mean the loss of calling on smaller ports. Soren Toth, head of MSC, noted that the cost would be really heavy on the Transatlantic, and you could see fewer services there. So basically, just kind of a pullback into their network because every time you're calling a U.S. port, you're looking at, you know, at least $1 million in extra tax. So why not reduce your exposure?

And then, of course, the other question is, well, then how does the cost get passed on? I think it's highly unlikely that you will see some carriers say, "Hey, your vessel is on a Korean ship coming from Shanghai, therefore no tonnage surcharge." More likely than not, they’re going to provide across-the-board tonnage, whether they have South Korean ships or Chinese ships, just because of a matter of actually being able to push this cost on.

They've done it similarly before with the low sulfur cost. They can't come together and say, "This is the range of cost that we're ready for in terms of surcharges," but they can individually float. And then the market kind of comes to a consensus.

But, I mean, the estimates are, you know, anything from like $600 to $900, $1,000 added cost on a TEU. So it is going to be significant. There's also the question of how the system would actually be able to collect this money. You know, we held off on some of the de minimis rules that were imposed by the Trump administration simply because Customs and Borders didn't have the software and capacity to handle it.

So, you know, Trump, I think, earlier in early March noted that there was going to be some more details on the shipbuilding program coming about. But I would say folks are taking it seriously even if they have major questions on its feasibility, both in terms of restoring U.S. shipbuilding but also just being processed.

Chris Rogers:
In our research, we came up with anywhere between $200 and $400 per 20-foot equivalent unit—so, a standard-size container. Heard some similar numbers around TPM. To Mark's point, nobody wants to put a hard number in the field because that then becomes an anchoring point for negotiations.

But let's say it's the lower end of $200. The Transatlantic rate at the moment is $1,000. That's 20%, roughly speaking, of the shipping rate. That's just huge. So, you know, how does that get passed on?

The other thing we've been thinking through from a supply chain perspective is, assuming that this money in some way ends up being used to subsidize the creation of a renewed U.S. shipbuilding industry, where does it go? Because a lot of the old shipyards were closed. They've been turned into, you know, beautiful apartment complexes and seaside resorts and all this kind of thing. So actually finding the locations to build these things—not all of the steel is currently made in the U.S.—so you need that whole back-end supply chain to be stood up. This is the work of a decade or more. So, you know, a few snap reactions and charges aren't going to cut it.

Kristen Hallam:
Chris, tell us about the Gemini model and what the significance of that is.

Chris Rogers:
Yes. So what we've seen in the shipping industry for many years was all the companies doing the same thing. You had three big shipping alliances. They ran their routes rather like a cruise ship—different port every day, stop for nine hours, jump off, have a bottle of rum and a bit of a party, come back, and go to the next port.

What we saw at the beginning of this year is the creation of a new system. Two of the shipping companies, Maersk and Hapag Lloyd, have set up a new alliance called Gemini. And rather than following this string approach—port to port to port—they have a hub-and-spoke model. They have five big hubs where the big vessels go from one hub to another, back and forth, and then they have shuttle services that go to all of the smaller ports.

The idea behind that is that those bigger vessels can then be run on a more efficient basis. In theory, that should mean a combination of higher profitability for the firms and/or lower costs for consumers if they choose to pass that through to the cargo owners. The challenge, of course, is: Can you achieve the same reliability? There's a lot more taking boxes on and off boats with that new model.

We're certainly interested to see—and will be analyzing using our network graph analysis—whether that is actually proving to be effective and is the way of the future, or whether at some stage Gemini just has to go back to doing what everyone else does because it's the tried-and-tested way. But there were certainly a number of presentations on that at TPM. And I guess, Mark, a lot of folks are talking about it as well.

Mark Szakonyi:
Yeah. I mean, the early signs were pretty good. We heard from Hapag Lloyd CEO Rolf Habben Jansen that it was a strong start. They were keeping to their 90% reliability. I moderated another session in which Simon Sundboell of eeSea, a third-party tracker, was saying that things were lining up.

But at the time, you know, the full loops haven't been completed. It's still early days, but I think there's far less skepticism about it than there was a year ago at TPM, when it was kind of shrugged off as a glorified hub-and-spoke rather than something far grander, more sophisticated, and really something that Maersk has been planning for years. That can be seen in many of its terminal investments into these kinds of secondary hubs rather than just, say, Singapore.

Kristen Hallam:
Well, let's look ahead to Breakbulk, which is coming up towards April. Mark, what is Breakbulk, and who attends that conference?

Mark Szakonyi:
Yeah. I mean, the early signs were pretty good. We heard from Hapag Lloyd CEO Rolf Habben Jansen that it was a strong start. They were keeping to their 90% reliability. I moderated another session in which Simon Sundboell of eeSea, a third-party tracker, was saying that things were lining up.

But at the time, you know, the full loops haven't been completed. It's still early days, but I think there's far less skepticism about it than there was a year ago at TPM, when it was kind of shrugged off as a glorified hub-and-spoke rather than something far grander, more sophisticated, and really something that Maersk has been planning for years. That can be seen in many of its terminal investments into these kinds of secondary hubs rather than just, say, Singapore.

Kristen Hallam:
Well, let's look ahead to Breakbulk, which is coming up towards April. Mark, what is Breakbulk, and who attends that conference?

Mark Szakonyi:
Yeah. So that's our annual event in New Orleans. It focuses on the breakbulk, special project, and heavy lift industry. These are folks handling anything really out of gauge that’s not going to move into a container or on a bulk vessel—things like wind turbines and energy gas equipment. If it’s massive and outsized, these folks are handling it.

One of the big issues is that USTR thing we discussed on the container side. A lot of folks are wondering how that’s going to be worked as a kind of government incident surcharge. There’s less worry, at least so far, within the breakbulk industry about it, partly because the market is quite busy outside of North America. But notably, there aren’t many U.S.-built breakbulk vessels. So there's a big concern about where this capacity would come from if this plan comes through.

To a degree, they’re also dependent on the container market. If the container market falls and rates become really low, you’re going to start seeing carriers being even more aggressive for some of that heavy lift project cargo. That has an impact on them as well.

As for who’s going to be there: It’s going to be the forwarders, cargo owners, carriers, and, of course, the ports and marine terminals that facilitate that on the land side.

Chris Rogers:
I guess there’s also going to be plenty of discussion about tariffs. A lot of these folks are supporting big projects where suddenly having an additional cost of 20% from China or 25% from Canada can really be a make-or-break factor.

Another issue we haven’t discussed much but is definitely floating around this year is the evolution of environmental policies. The International Maritime Organization has a big meeting in April where it’s meant to make some decisions on decarbonization. The shipping industry is now part of the European Union’s emissions trading scheme as well. So we’re certainly urging people: Look, tariffs tend to suck all of the oxygen out of the room, but step outside, take a breather, and see what else is going on.

Kristen Hallam:
Yeah. Emissions in supply chains is a really hot topic within the energy transition sphere for sure. So what will be the big topics at Breakbulk then, Mark?

Mark Szakonyi:
Well, I think USTR will be a major topic. We’ll be hearing from our colleague Susan about what the order book looks like and the balance in the market. As Chris noted, tariffs will also be a big focus.

Another issue that has really hit the industry has been the pullback on wind projects. That’s impacting turbines and a lot of that sector, which was really strong business for the industry in recent years. There is some excitement about some carbon capture projects for coal power that we’re seeing pop up in the Gulf. It’ll be interesting to see how much of that business will offset the loss in the wind energy vertical.

Kristen Hallam:
Well, we've unpacked a lot today. Sounds like a good place to wrap up our discussion. Thanks to both of you.

Chris Rogers:
Thanks very much.

Kristen Hallam:
Thank you for listening to the Decisive podcast from S&P Global. Please subscribe and join us for next week’s episode. Until then, stay curious and stay informed.