Tariffs, Labor Strikes, and Chokepoints

and the follow-on effects for global supply chains, fuel demand, and instability

Mobius Energy Shots

U.S. importers are racing to secure goods ahead of peak demand season, which this year coincides with new tariffs on Chinese goods, ongoing trade disruptions at three major maritime chokepoints, and a potential International Longshoremen’s Association (ILA) union strike in September.

1H24’s earlier-than-normal surge in U.S. containerized imports ahead of these 2H24 risks provided significant upside pressure on global and Asia-U.S. freight rates, welcoming follow-on effects for near-term inflation, 2H24 fuel demand, and 2025+ shipping industry fuel choices. Furthermore, we identify a long-term instability risk from prolonged Red Sea disruptions that warrants monitoring in 2025+.

On This Energy Shots

Tariffs, Strikes, Trade Route Disruptions

Tariffs on Chinese-manufactured components, ILA union strikes, and ongoing disruptions at three major maritime chokepoints have magnified 2H24 import risks, fueling front-loaded import demand.

U.S. Trade Representative (USTR) Section 301 Tariffs

On Tuesday, July 30, the U.S. Trade Representative (USTR) announced a two-week delay to Section 301 tariffs on imported Chinese goods unveiled in May, two days before the initial start date of August 1.

Now, the USTR anticipates a final rule by this week, with certain tariffs going into effect two weeks from the updated plan.

The tariffs outlined in the table below were originally planned to be phased in through 2026, depending on the maturity of non-Chinese supply alternatives.

Notable component tariffs beginning this year include:

  • Lithium-ion and non-lithium-ion batteries and battery parts (25% rate)

  • Electric vehicles, potentially implicating Chinese-manufactured vehicles for American firms like Tesla (100% rate)

  • Solar cells (50% rate)

  • Steel and aluminum products (25% rate)

  • Ship-to-shore cranes (25% rate)

Incremental inflationary pressure from these tariffs is worth noting, as China maintains a majority market share for nearly all of the component categories listed above.

For example, there are no existing U.S. manufacturers of ship-to-shore cranes. Approximately 80% of all ship-to-shore cranes in American ports are manufactured by Shanghai Zhenhua Heavy Industries Company (ZPMC) — a Chinese state-owned manufacturing firm.

The Port Authority of New York and New Jersey estimates that a 25% tariff rate increase on Chinese-manufactured ship-to-shore cranes would increase the cost of each unit by $4.5 million, a cost that ultimately passes through to consumer goods.

ILA Union Strikes

The International Longshoremen’s Association (ILA) sent a 60-day warning to the United States Maritime Alliance last weekend, outlining the union’s plans to strike if a new labor agreement isn’t finalized by the group’s current September 30 contract expiration. The union reportedly aims to increase wages by $5/hour for each year of the contract’s six-year term, translating to a 75%-80% increase in longshore workers’ wages.

A 45,000-member ILA strike would compromise U.S. Gulf Coast and East Coast ports.

While industry commentary downplays the probability of an ILA strike, the union’s election-year leverage and substantial wage demands have amplified 2H24 disruption risks and accelerated 1H24 import activity.

Trade Route Disruptions and Shippers’ Response

Houthi attacks accelerated in the first half of the year, reaching 52 attempted attacks in the first 27 days of June. As a result, shippers believe Red Sea disruptions are now entrenched. Danish shipping group Maersk confirmed that the impact on trade is “now expected to continue at least until the end of 2024” in its Q2 commentary.

Indeed, a closer look at the 7-day moving average vessel transits through the Bab al-Mandeb Strait and Suez Canal shows further deterioration from early 2024 levels, mirrored by the corresponding rise in Cape of Good Hope detours.

Bab al-Mandeb Strait 7-Day MA Vessel Transits -66.9%

Suez Canal 7-Day MA Vessel Transits -47.5%

Cape of Good Hope 7-Day MA Vessel Transits +71%

Panama Canal Still Recovering From Record Drought

Record low water levels at Panama’s Gatun Lake forced the Panama Canal Authority to implement transit restrictions through 2023 and early 2024. While water levels and restrictions are returning to normal, daily vessel transits remain approximately 21% below the 2019-2023 average for the first week of August.

Limited traffic through the Panama Canal adds upside to U.S. East Coast and Gulf Coast freight premiums, as this is the primary route for Asian exports to the Northern Atlantic and Gulf of Mexico.

U.S. importers responded to these 2H24 risks by front-loading imports ahead of their typical second-half peak season demand. Total 1H24 containerized imports gained 14.4% from the first half of 2023 to 12.04 million forty-foot-equivalent units (FEU).

U.S. Imports from Asia

Likewise, tariff-related uncertainty for 2H24 imports of Chinese-manufactured products incentivized front-loaded purchasing. U.S. containerized imports from Asia neared the seasonally adjusted 95th percentile in June—approximately 170,000 FEU higher year-on-year.

Port congestion in Asia and transit restrictions in the Middle East and Panama prompted a supply-driven surge in global freight rates in early 3Q24. The FBX global container freight index peaked at $5,182/FEU in mid-July—approximately 302% higher than the same period in 2023.

Global rates have since rolled over to $4,994/FEU (+222.5% YoY). However, as shown below, isolated 2H24 risks from ILA strikes and Panama Canal restrictions have provided upside support to Asia-U.S. East Coast rates.

Follow-On Effects To Watch

2H24 Inflation and Federal Reserve Cuts

Businesses or consumers will have to absorb elevated input prices from front-loaded 1H24 containerized imports alongside the rapid rise in freight rates.

The delay between securing Asia-U.S. shipping rates and businesses’ final sales to consumers suggests the extent of inflationary supply chain pressures is not fully reflected in the Fed’s data series through July 2024.

If businesses pass input prices onto consumers, CPI and PCE data will likely restrain the Fed’s eagerness for rapid 2H24 rate cuts to the detriment of labor markets and consumer spending.

Alternatively, should businesses absorb elevated input prices, downside risks will likely be reflected in the accelerated weakening of labor market conditions. As a reminder, most underlying labor market indicators are already deteriorating, suggesting further weakness will increase the frequency and magnitude of 2H24 Fed rate cuts.

2H24 Crude and Refined Product Consumption

Front-loading shipments for restocking and risk mitigation in the first half suggest that 2H24 deceleration will likely add moderate headwinds to second-half refined product and feedstock demand, amplifying the effects of ongoing declines in U.S. industrial sector activity.

2025+ Shipping Industry Fuel Planning Decisions

Chokepoint disruptions, extended trade routes, and near-term shipping-related emissions regulations in the EU and U.S. have renewed industry interest in fuel-flexible logistics.

In line with this theme, Danish carrier Maersk announced an order of ~400,000 FEUs of dual-fuel vessel capacity for its fleet renewal program between 2026 and 2030, replacing 80,000 FEU of conventional bunker-fueled capacity.

Dual-fueled vessels are capable of running on conventional bunker fuels like Ultra-Low Sulfur Fuel Oil (ULSFO) or Very-Low Sulfur Fuel Oil (VLSFO) as well as LNG or bio-LNG, limiting single-fuel risk exposure and enabling regional arbitrage opportunities.

Maersk’s decision to expand fuel-flexible shipping corroborates broader industry trends in global container order books. According to the latest data, over 37% (1.04M FEU) of ordered container ship capacity is capable of running on LNG, 26.9% (750k FEU) is capable of running on methanol, and 35.8% (1.0M FEU) on conventional bunker fuel.

Furthermore, industry adoption of LNG bunkering appears in data from two of the world’s largest ports by container loadings, the Port of Singapore and the Port of Rotterdam.

Long-Term Suez/Bab al-Mandeb Instability

Houthi Red Sea attacks and the follow-on effects for global shipping routes have materially impacted Egypt’s Suez Canal toll fees, the Egyptian government’s third-highest source of revenue that historically represented 10% of Egypt’s GDP.

The head of Egypt’s Suez Canal Authority announced last month that revenues fell to $7.2 billion in the 2023-2024 financial year from $9.4 billion in 2022-2023. Monthly data for May shows revenues fell 64.3% to $337.8 million from $648 million in May 2023, with monthly vessel transits falling to 1,111 from 2,396 last year.

With Red Sea disruptions expected to last through 2024, Egypt’s lost revenues welcome long-term supply chain instability risks.

Conflict in neighboring countries on Egypt’s southern border (Somalia-Ethiopia), Egypt’s western border (Gaza), and across the Red Sea (Yemen) warrant monitoring for 1) population flows and 2) ideological flows that opportunistically target Egypt’s economic turmoil.

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