Shipper group: Low-sulfur fuel to drive trans-Pac rates up

Shipper group: Low-sulfur fuel to drive trans-Pac rates up

https://www.joc.com/maritime-news/container-lines/trans-pacific-carriers-eye-deeper-capacity-cuts-amid-weak-peak_20190923.html

If carriers are unable to pass on the increased costs they incur from low-sulfur fuel requirements, they will likely reduce their level of service, including by further reducing vessel speeds. Photo credit: Shutterstock.com.

Editor's Note: An earlier version of this report incorrectly cited Gemini Shippers as suggesting trans-Pacific rates could increse rates up to 25 percent, when the group stated higher bunker fuel prices could lift rates up to 9 percent. JOC apologizes for the error. 

Importers in the eastbound trans-Pacific were warned Thursday by a large shippers association to expect at least a 9 percent increase in all-in freight costs next year after the International Maritime Organization’s (IMO's) low-sulfur fuel mandate takes effect.

Carriers have cautioned beneficial cargo owners (BCOs) since the TPM conference in Long Beach in March that with thin margins in the eastbound trans-Pacific, they will not be able to absorb any of the increased costs of the higher fuel and they intend to pass them on to customers.

Slower steaming is considered by some to be an option for carriers to reduce fuel consumption and therefore mitigate higher fuel costs, but Kenneth O’Brien, COO of Gemini Shippers Group, indicated that option comes with risks. 

“We don’t want [carriers] to absorb this cost because it will affect service even more,” O’Brien told an Auto Care Association webinar. “The idea of going slower seems almost impossible as the supply chain time is already extended.”

Under the IMO 2020 rule that takes effect Jan. 1, carriers must burn bunker fuel with a sulfur content of no more than 0.5%, down from the existing cap of 3.5 percent. They can attain this goal by burning higher-cost low-sulfur fuel blends or pay about $4 million to install a scrubber that would allow them to continue using cheaper high-sulfur fuel. While the payback time for scrubbers is estimated to be one to three years, scrubbers could become obsolete when the IMO is expected to announce regulations for greenhouse gas (GHG) emissions by 2023, Seabury Maritime noted.

Fuel accounts for at least 25 percent of the total freight rate in the eastbound Pacific. In a hypothetical example of the impact of fuel surcharges onall-in freight rates, Gemini/Seabury Maritime took approximate eastbound rates from Asia to the West and East coasts and broke out the bunker fuel portion. The approximate $1,450 per FEU freight rate to the West Coast includes $1,088 for ocean carriage and $363 for the bunker charge, meaning fuel comprised 25 percent of the total cost. The approximate $2,500 per FEU East Coast rate includes $1,807 for ocean carriage and $693 for fuel, so fuel accounts for 28 percent of the all-in rate.

Estimated LSFO surcharges for 2020 vary widely

Precisely projecting the ultimate cost impact of switching to IMO 2020-compliant fuel is difficult right now as carriers work out their formulas for next year, said Nikos Petrakakos, director and head of environmental innovation at Seabury Maritime. JOC.com’s conversations with BCOs and non-vessel-operating common carriers (NVOs) in recent weeks revealed that preliminary estimates they received from carriers produced a wide range of estimates: an additional $164 to $375 per FEU to the West Coast and $276 to $625 per FEU to the East Coast. 

Giving its own estimate, Gemini said today’s $1,450 per FEU all-in rate to the West Coast could increase by $130 to $1,580 per FEU because of IMO 2020. While $130 might not appear to be onerous, a $130,000 increase in total transportation costs for a BCO who imports 1,000 containers a year could be a shock if a company’s C-suite is not forewarned, said auto parts industry consultant Steve Hughes. He urged logistics managers to immediately begin the discussion with their financial officers about what to expect next year in terms of increased freight costs. “Report this up the chain to the C-suite,” he said.

As they prepare for carriers to roll out the new fuel surcharges for 2020, BCOs must scrutinize the surcharges of all the carriers they do business with in order to decide how to apportion their freight for next year’s service contract negotiations in the spring, O’Brien said. If BCOs don’t do this, “Your core carrier in Q1 could become your high-cost carrier in Q2,” he said.

However, O’Brien warned BCOs not to expect that carriers will begin to absorb some of the added fuel costs and use that as a competitive tool to attract business. Carriers’ profit margins have generally not been strong, so they do not have much leeway to absorb increased costs unless they slash service levels even more, he said.

BCOs should also anticipate further pressures on fuel pricing in the coming decade as the IMO turns its attention to reducing greenhouse gas (CO2) emissions. “IMO 2020 is just a start,” Petrakakos said. The IMO has already stated it will aim for at least a 50 percent reduction in GHG emissions by 2050, he said.

Hughes said tighter environmental restrictions in the freight transportation industry is now the new norm. “Unfortunately, it comes at quite a cost,” he said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

Comments

Thank you for the article. However, my math is not aligning with the headline, which says rates "to" increase 25% A $130 increase in fuel due to IMO on a $1,450 base rate (Gemini) is about a 9% increase. A $164 increase (JOC estimate) is only 11%.

Very good point, but don't let things like basic math and cost get in the way, carriers rarely do.

Good article but a couple of issues. One, trying to equate cost to price is something the carriers don't do and is why they have lost over $30. Billion in last ten years. They especially pay little attention to fuel cost in recent years, the increases in 2017 and 2018 over 40% and virtually ignored. Will they pay better or more attention to the IMO 2020 conditions? Apparently yes, so far, it could be the straw that breaks the camels back if not. But carriers rarely miss the opportunity to hurt their bottom line in favor of volume and market share. Second, the IMO impact, whoever doesn't know about it in the C suite, its been years in the making and headlines in industrial and general business periodicals for 18 months. If they haven't been told, they might consider their internal communication processes.