Tariff threats, low rates challenge ro-ro sector’s upbeat growth prospects

Tariff threats, low rates challenge ro-ro sector’s upbeat growth prospects

A Wallenius Wilhelmsen ship.

Above: A Wallenius Wilhelmsen ship at Bremerhaven port. Photo credit: Shutterstock.com.

Threatened tariffs, depressed freight rates, looming International Maritime Organization (IMO) 2020 emissions regulations, and pressure from clients are keeping the roll-on, roll-off (ro-ro) sector on guard, despite stable capacity and a still-expanding global economy.

The underlying signs are positive for trade in automobiles, high and heavy rolling stock, and mining, said Flavio Batista, head of North America sales at WW Ocean. “No one can predict what will happen with the trade wars, but if nothing goes wrong, Wallenius Wilhelmsen believes the global market will continue to grow.”

The numbers back his optimism. Real global GDP is expected to increase 3.4 percent through 2018, 3.3 percent in 2019, and 3.1 percent in 2020, according to IHS Markit, parent company of JOC.com.  

However, the Trump administration has threatened import tariffs on vehicles and automotive parts produced in the European Union, China, Mexico, Canada, and elsewhere, although the administration backed off from the EU threat in late July 2018 after a meeting with European Commission President Jean-Claude Juncker. According to IHS Markit, 6.7 percent of 2017 US auto sales were European imports.

Meanwhile, contentious North American Free Trade Agreement (NAFTA) negotiations continue, disconcerting but not yet disrupting a healthy trade. Because threatened and already-enacted tariffs include automotive parts and steel, as well as vehicles — whether from Europe, NAFTA, China, or elsewhere — automakers and manufacturers of high and heavy rolling stock in the United States will be affected by higher costs, and industry members expect prices to rise whether or not finished vehicle imports are taxed.

According to the US Department of Commerce, imports of passenger cars and light vehicles, land and ocean, totaled 8.3 million units in 2017, worth $191.7 billion, while exports of just under 2 million units were worth $57 billion. During 2017, the United States imported 2.4 million vehicles from Mexico, worth $46.9 billion, and 1.8 million from Canada, worth $42.5 billion. US exports to both countries totaled 1 million units, worth $26 billion.

Slowing global growth would hurt everyone

“If global economic growth is closed down, we’ve all got a problem,” said Patrick Cooper, Houston-based area manager for NYK Line’s Ro-Ro Division.

Tariffs are not the only potential storm on the horizon for ro-ro carriers. During Wallenius Wilhhelmsen’s second-quarter earnings report, CEO Craig Jasienski said that despite rising cargo volumes, freight rates are at the lowest levels the ocean carrier has seen in decades.  

Cooper said there has been an erosion in rates to all areas, even as costs rise. “All the cost components for carriers are increasing: sulfur emissions compliance, terminal costs, cyber protection, landside staff costs, canal charges; these are all going up and at same time customer requirements are even more demanding,” he said.

Carriers will seek freight increases and bunker fuel recovery; some have already instituted bunker adjustment factor increases. “Rates are going to have to go up, no doubt. That’s the ro-ro environment today,” Cooper said.

In the ro-ro market, “global demand has caught up with supply. We are balanced in most trade lanes,” WW’s Batista said. A surge in volume that began in 2017 caught Wallenius Wilhelmsen, along with other carriers, by surprise. The strong upturn is causing some capacity issues, as few vessels were ordered during the slow market between 2012 and 2017. Back then, “we were recycling old vessels. Results were not great. Rates had dropped, and the industry held back on ordering new vessels. Now we are seeing the results from scrapping, and the orderbook is low.”

The IMO's pending emissions regulations, set to kick in Jan. 1, 2020, will also have repercussions for the global fleet. The requirement to reduce sulfur content in bunker fuel from 3.5 percent to 0.5 perent creates uncertainty for ocean carriers and their clients globally. “We do not believe the low-sulfur regulations will be postponed. The IMO has been very firm,” Batista said. “Will all the vessels be retrofitted? Will there be capacity for the new fuel? Where will it be supplied?”

Scrubbers have been fitted on 25 ro-ro ships now in service, and 11 newbuildings on order will include them, according to IHS Markit. Wallenius Wilhelmsen will be fitting 20 vessels with scrubbers over the next few years, at a cost of $6 million to $7 million per ship, including dry docking and time lost. The new IMO regulations may provide a further incentive for demolitions and ship construction.

North American trade

Congestion is not significant in US ports, Cooper said, but it affects operations in Veracruz, a key port for Mexican automobile exports. Once in port, loading moves quickly, but slowdowns in Mexico have a domino effect on the entire schedule.

NYK Line has restructured services to deal with Mexican congestion, skipping Veracruz on some sailings and allowing more buffer time. “Of course, that costs money,” Cooper said. “There are some things you can’t change. Congestion is outside our scope, but we can address the basics. Keep our customers advised and stay close when time is of the essence.”

NYK has also restructured its Middle East service with direct calls from Houston and the US East Coast. The service was running via Europe and transshipping at Antwerp; however, the vessels often carry auctioned cargo, including heavy equipment, which tends to have maintenance and mechanical issues. Transshipping creates more exposure to delays of cargo, Cooper said. Going directly from point A to point B avoids problems.  

On the breakbulk and project side, ro-ro transport is benefitting from an upswing in oil and gas exploration. Equipment related to hydraulic fracturing is moving to countries such as Argentina with newly discovered shale resources, for example, Cooper said. Among the ro-ro, breakbulk, and container carriers, competition for segments of the breakbulk market continues.

Ro-ro port operations are becoming increasingly complex as clients ask for added port calls, Batista said, for a variety of reasons — to take advantage of government incentives, to avoid congestion, or so they can use less-expensive carriers. However, adding calls, or splitting volumes that formerly all went into one port, means carriers are forced to add capacity, without necessarily adding additional cargo.

“The clients want us to go to where there is inland capacity for storage and processing, and rail or truck for moving cars. On the outbound side, if the capacity isn’t there, they will change ports,” Batista said. “Some customers like to have 60 to 70 percent rail and the rest trucking, but now with the rail shortage, they have 60 percent trucking and 40 percent rail. It’s a problem on both sides. Both segments are having issues now.”   

During the first five months of 2018, the ports of New York-New Jersey; Jacksonville; Baltimore; Brunswick, Georgia; and Hueneme, California, dominated ro-ro imports and exports, according to data from PIERS, a sister company of JOC.com. WW Ocean has added the Port of Benicia in the Pacific Northwest as part of its Asia-North America trade, a third sailing from South America to North America, and another sailing from the East and Gulf coasts of North America to Mexico and the west coast of South America.  

State of the auto carrier fleet

In all, the global auto carrier fleet comprises about 630 ships, including 27 newbuildings. NYK Line, MOL, and “K” Line, all Japanese, dominate the car carrier market, operating some 260 vessels among them. South Korean EUKOR and Hyundai Glovis are the next-largest regional group. In the European sector, Wallenius Wilhelmsen and Hoegh are predominant. These seven carriers control almost three-quarters of global auto carrier capacity, according to IHS Markit.

WW Ocean, in combination with EUKOR and American Roll-on Roll-off Carrier, is operating 133 ro-ro vessels globally, Batista said. Titus, the first in a series of four high-efficiency ro-ro (Hero) neo-Panamax newbuildings, the only deliveries Wallenius Wilhelmsen is currently expecting, was deployed on the Asia-North America route on its maiden voyage this year. A second Hero vessel will be delivered later in 2018, and the final two in 2019. The vessels’ bunker systems can operate on different bunker qualities. All four vessels will have combined capacities of 32,000 car-equivalent units (CEU).  

Italian operator Grimaldi Group, currently operating 15 vessels, sports the largest car carrier orderbook: 12 vessels of 7,724 CEU each. Like many pure car and truck carriers, these also target the project cargo market, having adjustable/hoistable decks, and capable of loading out-of-gauge cargo of up to 500 metric tonnes (551 tons).

The vehicle carrier fleet is expected to grow by about 2.7 percent through 2018, after adjustment for demolitions. IHS Markit does not expect the orderbook to ramp up quickly, thanks to rising bunker fuel costs, a number of vessels still to be delivered, and a spate of fines imposed on some operators for conspiring to fix prices in the global market from approximately 2009 to 2012.

Carriers, including NYK Line, CSAV, MOL, Wallenius Wilhelmsen, and “K” Line, have thus far paid fines amounting to more than $400 million to regulators in the European Union, Mexico, Canada, Japan, Brazil, China, and the United States, and several executives have been jailed.   

Contact Janet Nodar at janet.nodar@ihsmarkit.com and follow her on Twitter: @janet_nodar.

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