March madness is coming for the global shipping industry

It’s also the time when ship operators, importers and freight forwarders sit down to discuss long-term contracts.

At the best of times this is an intricate dance between multiple stakeholders with billions of dollars in revenue, inventory and infrastructure on the line. Negotiating these deals is a massive exercise in game theory. Each party is trying to assess their own needs while guessing what their counterpart has to offer.

In 2024, the process could be even more complex than at the height of the Covid-19 pandemic when demand soared and logistics got snarled by shutdowns. We can think of the swing factors affecting shipping supply and demand as divided into anticipated and unanticipated variables. In the first category there are risks that the industry has always known exist, even if their timing or severity cannot be well forecast: inclement weather, crop yields, fluctuating oil prices and recessions. The unknown unknowns include war, pandemics, embargoes and sudden financial crises. .

Right now, the standard variables such as a possible recovery in global economies and resultant trade flows are not particularly clear. Even central banks aren’t quite sure which way the wind is blowing. More tricky, though, are two major wars that have no clear path to peace and whose impacts are spreading beyond the battleground. Russia’s invasion of Ukraine is into its third year, so shipping companies already know which sea lanes to avoid and how trade flows have changed.

The Israel-Hamas war, however, has spilled out into the Red Sea as Houthi rebels, supported by Iran, create terror and uncertainty for one of the world’s busiest shipping routes. There’s no way to predict when the attacks, which began in November and include missiles targeted at vessels in the waters near the Suez Canal, may end.

The game theory comes in when a buyer not only needs to assess its own needs, but work out whether shippers may have excess capacity in the future — because no one else locked it up in long-term deals — or could be short of slots because others made an early bet. The impacts on consumers range between shortages and stubbornly high inflation, or a glut and price cuts.

There’s already confusing signals flashing this negotiating season. Global trade is at a relatively normal level compared to the frenzied days of the pandemic, yet shipping rates remain high.

In this regard, the data points to bullishness. Hamburg-based xChange Solutions GmbH, which tracks container-price sentiment through its xCSPI Index, notes that while prices have dropped, the measure of the market’s mood hit an all-time high in February. It’s still in positive territory and much higher than a year ago, indicating “supply chain professionals remain positive about the container price hikes further into the month of March owing to the persistent Red Sea situation and its implications on supply chains,” xChange wrote March 5.

This year’s matchup between buyers and sellers offers players a choice: follow the hard data on consumer demand and economic recovery, or lean into sentiment and gut feeling. Either way, big bets will be placed or we’ll all wear the consequences.