How will the container industry recover $60bn in higher fuel costs?

How will the container industry recover $60bn in higher fuel costs?

Industry consultant Neil Dekker reckons a healthy dose of transparency will be vital for liners starting next year.

The way in which ocean carriers will price their services will significantly change in 2019 because of new IMO fuel regulations. They will be more cost driven and will focus on yield management in an effort to actually drive profits – after what will inevitably be a poor 2018 financial performance for them. And this is despite fairly strong global volume growth of 4-5%.

But as an industry, we should no longer focus on predicting where we see “rates” going up or down by X% – which in itself is pretty meaningless, as there are so many trade lanes all with different dynamics – but on base freight rates and bunkers separately. Each have many different drivers.

The major shipping lines have made it very clear to the market in the last few months that they will be passing on additional fuel costs to shippers from January 2019 and that this will be via a separate surcharge. They need to make money and the CEOs of several companies have stressed this. If not, the very real expectation is that ships and services will be idled, which will massively disrupt the supply chain. The last time this happened in 2009, the ocean carriers re-aligned supply and demand and it became a carriers’ market in 2010 with the idle fleet reaching 9-10%.

There are a number of operational issues to sort out for operators before the IMO low sulphur fuel regulations are effective from January 2020, but the commercial pricing arena is equally confusing at the moment. There should no longer be a debate on whether or not operators alone should pay for the increased costs, but the mechanisms and methods of charging need to be openly discussed between parties and become much more transparent. Ocean carriers have historically been scant with the facts when introducing different industry surcharges, but if ever there is a time to change this for the better, it is now. Those carriers who are the most open will surely benefit within the shipper community.

While most carriers state that they will implement or seek to enforce separate bunker surcharge mechanisms from January 2019, there are a number of questions that remain unanswered or at least unclear:

· Currently, there is no recognised industry standard low sulphur fuel price index and there will probably not be a global standard grade which in any case can be utilised by all market participants by Jan 2020. Argus and Platts are at least a work in progress to help the industry provide guidance. Carriers will need to be very specific with which data they are basing their price calculations on.

· Fuel prices fluctuate across major bunker ports – so for many trades, which price and at which port will carriers base their calculations on?

· On certain niche trade lanes, carriers may need to deviate ships to bunker at specific ports – how or will these costs be built into freight rates?

· All credit to Hapag-Lloyd for producing a document last month that attempts to give market transparency on methodology. However, the inference is that average or general market data will be utilised (average size ships per trade, average fuel consumptions, average fuel prices). If this is the case, the resultant bunker cost is hardly representative of Hapag-Lloyd’s specific costs i.e. its owned fleet, vessel consumption. For some carriers this could be advantageous if they do not operate a fuel-efficient fleet.

· For ocean carriers only providing slots on a particular route and who are not operating ships within the service– they are not responsible for fuel costs and pay the primary carrier an agreed rate – will they charge shippers an additional BAF on top of the freight rate? And if so, how will this be calculated?

· For operators using low sulphur fuel oil on given vessels on given trade lanes, calculations will surely be based on prevailing market prices. But, for operators opting for scrubber technology and utilising lower priced IFO380 grades, there are CAPEX costs of buying and fitting the scrubbers as well as ongoing maintenance. Unless there is transparency on these costs, the market has no idea what they are and therefore how they should be fairly priced. These are surely very different to the price differentials between IFO and LSFO and the pay-back time for the original CAPEX will differ.

· Where operators are chartering in vessels with scrubber technology, these additional costs will no doubt be built into a higher daily charter rate for the agreed term. Carriers will no doubt seek to pass this on, but will this be built into the base ocean freight rate or a BAF and if so, how?

· For longer term contracts, will shippers be allowed to bring their own BAF formulae to the negotiating table? Ocean carriers willingly let them do this when IFO 380 previously hit $600 per tonne or over in the recent past and they needed cost recovery.

· Very little if any discussion has been made on pricing within short-sea markets such as intra-Europe. In addition, short sea feeder operators have traditionally found it extremely difficult to recover bunker costs from the main line operators when providing critical feeder services. If this practice continues, feeder operators will surely not be able to provide a service.

· After a period of time, will the industry naturally find a standard BAF formula across trades which is accepted by the market or will these remain separately priced by individual operators?

So, the industry needs to find acceptable solutions quickly – to be transparent and to have detailed and meaningful discussions with shippers if indeed they wish to achieve some meaningful cost recovery. European freight rate contract negotiations are starting now for example. If the projected $60bn in additional industry costs are indeed to be recovered fairly, the industry owes itself to be transparent about the process.

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1 Comment

  1. Chas Deller
    November 24, 2018 at 10:14 pm

    Excellent article Neil.

    Chas