in International Shipping News 15/10/2019
Container shipping lines will attempt to pass on extra fuel costs due to the introduction of low-sulfur IMO 2020 fuels next year. If shippers prove unwilling to foot the bill, carriers will likely make major cuts to service levels, according to a new analysis by Drewry Shipping Consultants.
The analyst estimates box shipping lines will be faced with an additional $11 billion fuel bill next year due to the switch to low-sulfur fuel oil, although the recent drone attacks on Saudi oil facilities have muddied estimates by adding to oil price volatility.
The degree of compensation that carriers receive from shippers will dictate the level of service disruption during 2020, believes Simon Heaney, senior manager of container research at Drewry and editor of the Container Forecaster.
“Our working assumption is that carriers will have more success in recovering that cost than previously, to the point that there will be no major disruption to supply,” he said.
However, as reported in FreightWaves, “bewildered” shippers and forwarders have expressed confusion over the timing and transparency of new charges now being introduced by container lines as they phase in low-sulfur fuels — and pass on higher costs to customers — ahead of the Jan. 1 mandatory implementation date set by the International Maritime Organization (IMO).
Shippers are also wary that container lines might hike the fuel component of freight to compensate for bearish spot rates.
“Most shippers accept that they will have to pay more but they rightly expect any increase to be justified with a credible and trusted mechanism — in other words, the ball is very much in the carriers’ court,” said Heaney.
If lines do fall short in recovering IMO 2020 fuel costs from customers by a significant margin, Drewry believes they will “dust off the decade-old playbook” that saw them through the global financial crisis of 2008-09. “There will be much less focus by carriers on service quality and more on cost-cutting,” added Heaney.
“In that scenario, carriers will try to protect cash flows by restricting capacity as best they can, through a combination of measures, including further slow-steaming, more blank sailings, and off-hiring of chartered vessels.”
There also could be a push bylines to fit scrubbers to avoid the premium pricing on low-sulfur fuel. Vessel demolition rates could accelerate too.
“If events follow this path, the supply-demand balance will look very different from our current forecast,” said Heaney. “The worst-case scenario, when most shipping lines cannot operate close to breakeven and some potentially face bankruptcy, would actually be a far quicker route to rebalancing the market than the current plodding track.
“It would take a very brave carrier to want such a turn of events, but for those that could be sure of coming through the other side, after some initial pain the rewards would be far greater.” Higher operational costs for lines come just as demand is turning bearish. Drewry said the “mood music” surrounding the container market had deteriorated further in the last three months. As a result, the analyst has downgraded its 2019 world container port throughput forecast to 2.6% in 2019, down from the previous 3.0% expectation.
Source: Freight Waves