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Indiaexportnews.com

Box shipping in for a tough ride with higher fuel costs

  12.03.2019    

Back in the day confidence in the container shipping industry could be gauged by the ever-increasing scale of the vessels and ship order sizes.
Nowadays the carrier's mega ships that ply the world's biggest trade routes look more like monuments to brash corporate planning and projections built out of hopes rather than reality, according to an article by The Wall Street Journal that warns of a storm gathering over box shipping.
From slowing global trade to rising fuel prices to capacity increasingly out of step with demand, container shipping players are facing new challenges over the coming two years, tarnishing prospects for a recovery after a decade of moving in fits and starts towards stability, the commentary said.
It noted that the cost of moving goods around the world could go up "sharply" as regulations calling for cleaner - and more expensive - marine fuels are introduced next year.
Estimates are that shipping companies will try to pass on to cargo owners US$10 billion a year in combined additional expenses from the new fuel requirements but they will almost certainly have to take on board some of those costs to maintain their customers.
At the current rate of new ship deliveries, it will take at least two years to mop up the surplus capacity. It means that on top of higher fuel expenses, freight rates likely will continue to hover way below break-even levels across some of the biggest trade lanes.
With China's economy slowing and shipments taking a hit from the evolving trade dispute between the US and China, operators are already slashing their full-year forecasts.
"We see clearly a global economic growth that is declining," A P Moller-Maersk AS chief executive Soren Skou told an investor conference call recently. "We see weaknesses, in particular, in China and Europe. We expect container demand growth to fall to one per cent to three per cent this year from 3.7 per cent to 3.8 per cent last year."
Denmark's Maersk said this year will be subject to considerable uncertainties because of the risks of further restrictions on global trade. It added that a new regulation by the International Maritime Organization to lower sulphur content in marine fuel "will bring significant increases" in bunker prices. Industry experts expect the IMO rule will crank up ship fuel costs by one-third.
Equities analyst David Kerstens of Jefferies LLC in a report last week noted that Maersk is likely to recoup its $2 billion in added fuel costs, but "irrational behaviour with price competition remains the key risk factor and could potentially trigger the fourth wave of sector consolidation and a shakeout among some of the smaller loss-making and financially distressed Asian carriers."
"The fuel price increase is very significant and there will be a premium in freight rates," Ocean Network Express CEO Jeremy Nixon told The Wall Street Journal in an interview. "We are trying to pass on the fuel charge to customers but we are not doing it very effectively."
The operators are at a critical point of the year on shipping prices, with negotiations on annual freight rate contracts now under way with their biggest customers, including Walmart Inc, Home Depot Inc, Amazon.com Inc and Target Corp.
Consulting firm AlixPartners LLP said in a report recently that ships on the main Asia-Europe trade route would need to raise rates by 40 per cent and 33 per cent for the transpacific trades.
Shipping executives say uncertainty over the availability of cleaner fuels makes price estimates this year little more than a guessing game. "It has turned the shipping market, the transportation market, into a casino," said Cyprus Union of Shipowners president Andreas Hadjiyiannis.
The worsening imbalance between shipping capacity and demand only adds to the uncertainty.
London-based Braemar ACM Shipbroking Services PLC estimates demand for container shipping will rise between two per cent and three per cent annually over the next four years, while fleets are expected to expand at a five per cent annual rate. One-third of the new tonnage will be mega ships that carry up to 22,000 TEU.
The carriers are struggling to keep the ships full to make up for the big capital outlays, however, and the effort is crashing against supply chains. Shipping lines are cutting weekly services to get as many boxes as possible on each ship, which means fewer port calls and delays in deliveries.
"It's the A380 superjumbo," said SeaIntelligence Consulting CEO Lars Jensen. "It only works in specific corridors, otherwise it's too big."
Clearly, the world's container shipping lines are stuck with their mega ships and only a big rebound in global trade will turn around their business, The Wall Street Journal concluded.



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