Analysts: Prepare for pricier container shipping

Analysts: Prepare for pricier container shipping

"The industry may not have to wait that long for a turnaround," Parash Jain, global head of shipping and ports equity research at HSBC, told the TPM Asia Conference. Photo credit: JOC.

SHENZHEN, China — Shippers face a double whammy of higher freight rates and fuel costs even as trade growth slows and container shipping sees a further round of consolidation, senior maritime and trade analysts said on Wednesday. 

Freight rates are set to climb amid more balanced growth between cargo demand and vessel supply, while fuel costs will rise as carriers switch to low-sulfur fuels to comply with the International Maritime Organization's (IMO's) tougher emission controls from January 2020. 

Container ship construction orders have fallen to a multiyear low with this capacity representing less than two years of cargo demand growth and vessel scrapping, Parash Jain, global head of shipping and ports equity research at HSBC, said Wednesday at the TPM Asia Conference in Shenzhen. 

“The industry may not have to wait that long for a turnaround,” Jain said.

His views were echoed by Rahul Kapoor, vice president and head of research and analytics, maritime and trade at IHS Markit.

“I think freight rates will be higher over the course of the next few years,” Kapoor said. 

The supply of container ships will also tighten, putting further upward pressure on freight rates. About 10 percent of the current fleet is 20 years or older, Jain said. Even ships built in 2006-07 are potential scrapping candidates, Kapoor added, as operators seek to comply with the IMO's 2020 emissions regulations, requiring the reduction of sulfur emissions from 3.5 percent to 0.5 percent, starting Jan. 1. 

Jain said the fuel related cost of shipping a TEU from Shanghai to Rotterdam could nearly double as carriers switch to low-sulfur fuel. He pointed to how the current fuel component of shipping a TEU container to Rotterdam is about $100 based on ships using traditional high-sulfur bunker fuel and a spot charter rate of $600 per TEU. Fuel costs would climb to $187 per TEU for carriers using low-sulfur fuel. 

“I'm less optimistic carriers will be able to pass through costs” onto shippers, Jain said. 

No clear solution to decarbonization

On the longer term goal of decarbonization with the IMO's aim that shipping should slash greenhouse gas emissions by 50 percent by 2050, there is no technical solution yet for shipping to meet that goal, said Philip Damas, director and head of Drewry Supply Chain Advisers.

Steve Saxon, a partner in McKinsey & Company focusing on shipping and ports, said the shipping industry is “going to have a difficult transition” as it paused new building orders while alternative fuels, including hydrogen-based sources, were developed.

Orders could dry up in 2025-27 because owners would not order ships that had a 25- to 30-year life unless new fuel sources were available.

In the short term, though, carriers face more pain as the trade slowdown continues and they experience a softer second half of this year compared with the first half.  Drewry on Monday lowered its global container volume growth outlook for the rest of the year to 2.6 percent from 3 percent. 

“The global outlook remains weak. Global manufacturing PMIs paint a cautious outlook for demand,” Jain said. “The sector's operating margins remain thin and vulnerable to cost pressures and further rate erosion.”

Saxon expected further consolidation among carriers following recent deals that included Cosco Shipping's takeover of Hong Kong's OOCL.

“The easy ones have been done. Those that are left are more difficult,” Saxon said. He thought recent mergers had been successful, creating significant synergies, while keeping separate brands. 

Drawing a comparison with the merger of airlines Air France and KLM, which remain separate operationally despite under a single holding company, Saxon said, “We may see some innovation. We may see the same in [ocean carrier] consolidation.”

For shippers, that would mean less choice, said Damas, noting cargo owners previously had 20 different bids from carriers but now there were just seven or eight major lines on big trades.

“On smaller trades there are five or six carriers,” he said. “Over the next three or four years we could see quite a big change in competition.”

Contact Keith Wallis at keithwallis@hotmail.com.

Comments

If capacity is managed to actual market sizes, and carriers use pricing discipline, then rates can go up.