Ocean Freight Strategy Amid Supply Chain Volatility

Navigating the Strait of Hormuz crisis and positioning for an uncertain market 

The ocean freight market operates in a state of continuous flux. Port labor negotiations, supply-chain disruptions, geopolitical developments, and energy price volatility each present distinct challenges requiring executive attention. The current conflict in the Middle East has effectively restricted commercial transit through the Strait of Hormuz, generating significant implications across global trade lanes. 

In a recent discussion, Travis Epp, Partner-in-Charge of EisnerAmper's Manufacturing & Distribution practice, consulted with Kelly Moroney, Director of Ocean Freight at RIM logistics. Ms. Moroney brings over 30 years of industry expertise to these matters. The following outlines strategic considerations for executive teams navigating the current environment. 

Key Takeaways 

• The recent restriction of commercial transit through the Strait of Hormuz is significantly impacting global trade lanes, thus causing fuel costs to rise and equipment availability constraints. 
• Upcoming IEEPA tariff refunds could shift freight demand and rates depending on how importers use the refund dollars (tax planning, workforce investment, replenishing inventory, or sharing with customers). 
• Organizations should incorporate flexibility into their supply chain strategy as the market stabilization timeline is uncertain. Instead of static planning approaches, prepare for the impact of IEEPA refunds to reduce volatility with scenario planning. 

Strait of Hormuz: Assessing the Operational Impact 

Approximately 20 million barrels per day transit the Strait of Hormuz, which accounts for about 20% of total global petroleum liquids consumption and about 25% of global seaborne oil trade, according to the U.S. Energy Information Administration (EIA). Its effective closure is driving emergency fuel surcharges across trade lanes. Given that approximately 40% of ocean freight rates are tied to fuel costs, the financial impact extends globally regardless of whether cargo directly transits the region.

CAPACITY VS. FUEL: STRATEGIC ASSESSMENT

From a capacity standpoint, the direct impact may be more limited than initial assessments suggest. Approximately 1% of global containerized trade transits the Strait of Hormuz. The more material concerns involve fuel cost escalation and equipment availability constraints. Extended routing around the Cape of Good Hope increases container cycle times, while carriers work to reposition vessels and establish alternate cargo flows. 

Current Operational Disruptions 

Carriers that had been preparing to resume Red Sea transit via the Suez Canal have suspended those plans for now. Iranian-backed Houthi forces in Yemen continue to present security risks to commercial vessels, creating concerns for vessel assets, crew safety, and cargo integrity. 

Cargo is now routing around the Cape of Good Hope, adding approximately 10-14 days to most trade lane schedules. This extended routing increases fuel consumption and equipment cycle times. 

Carriers are offloading significant cargo volumes in India as part of vessel repositioning efforts. This creates customs complexities, as the cargo was not originally manifested for that routing. 

Duration remains the critical variable. An extended conflict will amplify pressure on fuel costs and equipment availability. In addition to standard bunker calculations for shipping ocean freight, many carriers are also implementing emergency fuel surcharges. 

Contract Season Strategy 

For organizations operating in the Trans-Pacific eastbound market, contract negotiations are proceeding amid elevated uncertainty. A balanced approach to contracting merits consideration: securing a portion of volume at fixed annual rates while retaining flexibility to access spot-market pricing. This structure provides a hedge against cost volatility given uncertainty surrounding both the conflict and broader market conditions. 

PEAK SEASON SURCHARGE CONSIDERATIONS 

Some larger importers pursue contracts exempt from peak season surcharges (PSS). This approach warrants careful evaluation. Carriers typically optimize vessel revenue, and while minimum quantity commitments are honored, lower-margin cargo may receive reduced priority when capacity tightens. Fixed rates provide value, but contracts without surcharge flexibility may result in reduced space allocation during peak demand periods. 

IEEPA Refund Distribution: Market Implications 

The anticipated distribution of IEEPA tariff refunds introduces an additional variable into freight market dynamics. Prior to the current administration, many importers accelerated inventory purchases in anticipation of tariff implementation. This created an import surge followed by relatively stable demand, with inventory levels remaining elevated longer than many anticipated. 

The strategic question is how organizations will deploy refund capital. Several factors merit consideration: 

REFUND DEPLOYMENT CONSIDERATIONS 

• Tax implications: Refunds constitute revenue with associated tax obligations that require planning 
• Workforce investment: Some organizations may allocate funds toward compensation or personnel development 
• Inventory replenishment: Others may utilize capital to resume purchasing activity 
• Customer considerations: Organizations that allocated tariff costs to customers should evaluate whether contractual or relationship obligations require sharing refund proceeds with downstream partners 

Should a material portion of refunds flow into accelerated purchasing, market capacity may be tightened, with potential implications for rates and space availability. Organizations should incorporate scenario planning into their supply chain strategy. 

STRATEGIC PRIORITIES FOR EXECUTIVE TEAMS 

• Evaluate balanced contracting approaches: Consider combining fixed annual rates with spot market flexibility. 
• Assess PSS exemption trade-offs: Contracts exempt from peak season surcharges may reduce carrier prioritization during capacity constraints. 
• Monitor fuel cost exposure: Approximately 40% of ocean rates are fuel-linked; continued volatility is anticipated. 
• Plan for extended equipment cycles: Rerouting is extending container timelines globally and tightening container availability. 
• Incorporate refund scenarios: Model how IEEPA refund deployment may affect market demand and customer expectations. 

Current conditions suggest that static planning approaches may prove insufficient. Organizations that incorporate flexibility into their supply chain strategy may be better positioned than those awaiting market stabilization. Contact us to discuss how we can assist.