Shippers negotiating new contracts this year face a major rates dilemma as the maritime industry contemplates a return to using the Suez Canal.
When carriers revert to transiting the canal, the reduction in voyage tonne-miles will begin to expose the overcapacity in the market, pushing a significant downward trend in freight rates, especially on Asia-Europe trades.
Shipping analyst Drewry estimates rerouting round the Cape of Good Hope reduced effective capacity by around 9%, "which has helped carriers once again post some very strong quarterly profits in the past 12 months".
It added: "The relationship between the diversions and carrier fortunes is well understood. Liner stock prices have taken hits whenever Gaza ceasefire talks have looked promising, and already some major carriers are seeing downgrades from ratings agencies on the latest development."
The Global Shipper's Forum (GSF) and MDS Transmodal estimate that if Red Sea transits are resumed by all the liners, some 70 ships, with about 500,000 teu capacity, will become surplus to requirements.
But when exactly this would happen has left contracting parties with a major dilemma.
Matthew Gore, partner at law firm HFW, told The Loadstar shippers may want to take a 'wait and see' approach before committing to any long-term contracts under Cape of Good Hope rates.
"They could potentially be 'waiting and seeing' for quite some time before they see any change, and regardless will still need to be moving traffic in the meantime," he warned.
Mr Gore explained that, depending on the approach taken by carriers, shippers could seek shorter-term agreements or resort to the spot market, but "neither are ideal".
Indeed, Xeneta predicted that while spot rates would be "trending strongly downwards" amid a Suez return, they would be "extremely volatile".
Mr Gore advised: "The sensible approach will be to consider index-linked contracts," and added: "If current rates include Red Sea surcharges, shippers should seek to have these dis-applied as soon as Red Sea transits resume."
Alternatively, GSF director James Hookham suggested shippers and carriers agreed two rates. he explained: "A 'Cape rate', that continues as long as the lengthier and more expensive route is used, and a 'return to Red Sea rate', that would apply should 'normal' services resume and reflects the lower costs and quicker sailing times."
He added: "A 'twin-rate contract' will allow both parties to firm-up commitments for the 2025 peak season knowing what their respective costs and revenues will be under each scenario.
"Depending on the political stability in the region, maybe twin-rate contracts will become a feature on Asia-Europe trades for the next few years?"
Mr Hookham acknowledged that while such deals may be considered unconventional, "this is what resilience planning looks like in the rest of commerce - anticipating different events and jointly developing solutions in advance to be activated under pre-agreed conditions".
But he questioned whether shippers would commit to any contract, "because the 2025 market is going to be unusually turbulent".
He told The Loadstar: "A falling spot rate later in the year is widely anticipated, so shipping lines may need to 'make it interesting' for shippers to commit to a contract.