Carriers cite renewed US–Iran tension to slow rate decline via surcharges

The Analysis

Xeneta's weekly note reads like a weather report this week: spot rates on the major Far East trades began softening in late July, and carriers are pointing at renewed US-Iran tension and higher bunker costs to justify surcharges that slow the decline. Rising capacity and cooling demand are working against them. The line that gets quoted is that they will not defy gravity.

Gravity wins, eventually. The trouble is that eventually is not a billing date. Between the week the spot rate turns and the week your bill of lading is dated, you are holding a number that is falling and a surcharge that is not, and the invoice is the sum of the two. That sum is the only figure that matters, and it is the one number this story does not give.

There is no absolute rate in the source, so I am not going to invent one. Everything below runs on index points and percentages. That is enough to show where the money moves and where the lock line sits.

Start with what the source actually asserts, because the verbs are doing a lot of work. Spot rates on the major Far East trades began softening in late July. Carriers are using renewed US-Iran tension and higher bunker costs to justify surcharges. The surcharges slow the decline. Capacity is rising. Demand is cooling. Read those five sentences in order and notice that four of them describe direction and only one describes a mechanism. Softening is a vector, not a number. A week of softening could be one point or eight, and the story does not say which. That is the first thing I would not take at face value, because the entire negotiation you are about to have depends on magnitude, not on sign.

Take the invoice apart instead. What you pay per container is not a rate. It is a stack: base ocean freight, a bunker adjustment, a peak or general surcharge, and then origin and destination charges that never appear in any index. Each layer moves on a different clock. The base moves weekly and is set by a market you can see. Bunker moves on a published fuel benchmark with a lag of a few weeks. The surcharge moves when someone announces it, on a date someone chooses, and it is the only line in the stack that can travel upward while every other line travels down. That is not a coincidence. That is what the instrument is for.

Who eats it depends on a clause most commercial teams never read closely. Under FOB, the buyer books and pays the ocean leg, so the buyer captures the falling base and absorbs the rising surcharge, and the two roughly cancel: the buyer's experience is that nothing is getting cheaper. Under CIF or CFR the seller pays, and the seller usually quoted a delivered price to its customer months earlier, which means the surcharge comes straight out of a margin that was already fixed. Same market, opposite sign. On the export side of Asia-Europe and the transpacific, the FOB shipper is insulated on price and exposed on space; the importer buying FOB is exposed on price and, in a soft market, briefly comfortable on space. That split is where the argument inside most companies actually happens, and it is usually settled by whoever owns the freight budget rather than by whoever owns the risk.

The clock is where this gets practical. A surcharge announcement is not a surcharge charge. There is normally a notice window between announcement and effective date, and the trigger is almost always the bill of lading date rather than the booking date. That single detail moves the cost across a boundary you control. A booking confirmed in the softening window, with a sailing after the effective date, pays the new number. A shipment that clears before it does not. In a market where the base is falling by an unknown amount per week, a two-week gap between booking and sailing is a real exposure, and it is the kind of exposure that never shows up in a budget review because nobody put it there.

Here is the arithmetic, with my own assumptions stated plainly because the source gives no absolute rate. Set an all-in index at 100, split 80 base and 20 surcharge; that split is my illustration, not a published figure. Now let the base fall 8 percent, which is 6.4 points, and let the surcharge add 4 points, which is a modest move for an instrument like this. The all-in lands at 97.6. The headline says rates fell 8 percent. Your invoice fell 2.4 percent. The gap is 5.6 points, and 5.6 points of a monthly ocean freight budget is not a rounding error, it is the difference between the number your category manager was told and the number the controller will see. Build a landed cost on the headline and you are short by that gap, and you will find out at the month-end accrual, which is the worst possible time to find out.

Now the part the coverage leaves out, which I think is the whole story. In a rising market a surcharge is a price: it is meant to be paid. In a falling market a surcharge is a floor marker. It is not there to be collected in full. It is there to be traded, and what it gets traded against is the base rate and the validity period. A carrier announcing a surcharge into rising capacity and cooling demand has very little enforcement power. The announced number and the number that actually clears are two different things, and the gap between them is the only real information in the market that week.

Which changes the question worth asking. Not whether the surcharge will stick, but what the carrier wants in exchange for dropping it. The answer is usually a volume commitment, a longer validity, or a fixed share of your allocation, and all three cost more over twelve months than the surcharge costs over six weeks. Win the surcharge argument and lose the validity argument, and you have lost.

Ask what happens without the surcharges. The base would fall faster and more visibly, importers would capture the gain a month or two earlier, and carrier unit revenue would compress at exactly the moment new capacity is being delivered. That compression has a predictable consequence: blank sailings, then service consolidation, then a capacity withdrawal that turns a slow slide into a sharp move the other way somewhere down the line. So the surcharge is a smoothing device. It converts a fast drop into a slow slide, and smoothing is not free. The bill for a smooth curve is paid by whoever is buying on spot during the weeks the curve is being held. I am not arguing the carriers are wrong to do it. I am saying the cost of the smooth curve is not distributed evenly, and you should know which side of it you stand on before you sign anything.

The trap is the all-in lock. In a rising market an all-in twelve-month contract is protection. In a falling market with a temporary surcharge inside it, an all-in lock means you buy the floor and hand the carrier an option on everything below it. You pay 97.6 for a year while the market walks to 92, and the surcharge that justified the floor quietly expires in eight weeks. The asymmetry is not subtle and it is not priced. Anyone offering you a fixed all-in right now is selling you a floor at the one moment when the floor is the only thing in the market that is not falling.

Gravity does win. It just bills monthly on the way down, and the bill has a surcharge line in it. My lock line, on relative points only: if the all-in fails to fall across two consecutive weekly prints while new capacity is still being delivered, the floor is being defended, and I would lock 60 to 70 percent of Q4 volume within ten working days. If the all-in falls 5 percent or more across two prints, stay on spot and lock nothing. You are being paid to wait, and the surcharge will be the first thing to go when the carrier needs your volume.

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— By Vivian Zhao