Early January low-sulfur price jump spurs Hapag-Lloyd surcharge hike

Early January low-sulfur price jump spurs Hapag-Lloyd surcharge hike

Hapag-Lloyd has increased its low-sulfur fuel surcharge following soaring bunker prices through much of January. Photo credit: Shutterstock.com.

Hapag-Lloyd will raise its low-sulfur surcharge for exports from China and Hong Kong on March 2 for 30 days following “strong price fluctuations” in the fuel price since the imposition of the IMO 2020 mandate on Jan. 1, the German container carrier said in a statement earlier this week.

The carrier joins Maersk Line, which in late January increased its bunker adjustment factor (BAF) by $50 to $200 per TEU across all trades. While Hapag-Lloyd did not give a similar range of pricing, it said the price per ton of very low-sulfur fuel oil (VLSFO) had fluctuated by more than $45 over the past month, triggering the monthly review of its Marine Fuel Recovery (MFR) mechanism.

To manage the volatility in fuel pricing, the Hapag-Lloyd MFR takes into account vessel consumption per day, fuel type and price, sea and port days, and the number of TEU carried. The increase in the low-sulfur surcharge will be effective until March 31.

While the chaos that could have erupted on Jan. 1 didn’t materialize, VLSFO prices jumped sharply in the first week of January, only to collapse over the rest of the month.

On Feb. 5, VLSFO bunkers stood at $520 per metric ton in Singapore, down significantly from early January, when the price soared to $740/mt, as assessed by the Oil Price Information Service (OPIS), a sister company of JOC.com within IHS Markit. The closely watched spread between VLSFO and high-sulfur fuel oil (HSFO) in Singapore is currently at $200/mt, down from $359 in early January.

In the European bunker hub of Rotterdam, VLSFO prices on Feb. 5 were assessed by OPIS at $458/mt, $177/mt higher than HSFO, while in Houston VLSFO was at $475/mt, against HSFO that was $116/mt cheaper.

“Weaker seasonal bunker demand in February is being made worse by slowing trade as a result of the spreading coronavirus in China and has also weighed on demand for VLSFO bunkers,” Freight Investor Services (FIS) said in a note.

But even though VLSFO prices have fallen off their January high, the additional costs are still a significant financial burden to carriers. In its fiscal third-quarter financial results, Ocean Network Express (ONE) predicted average fuel costs in its final quarter from January through March would increase 33 percent because of compliance with the IMO 2020 mandate.

Rates below fuel recovery levels

Analysts and other market watchers say they are not seeing the level of rate increases needed in both the contract and spot markets to cover the higher operating costs. 

Patrick Berglund, CEO of rate benchmarking platform Xeneta, said although the long-term contract market picked up in the Asia-Europe corridor through January, the rates were in line with levels seen in 2019 and 2018 that had no IMO 2020 regulations.

“The carriers have yet to find the right formula for recouping the cost of more expensive fuel,” he said. “They face real difficulties on commoditized routes, where pricing is critical to achieve market share, and the slight rises we see are mainly because of basic supply and demand, nothing more.”

Sea-Intelligence Maritime Consulting CEO Lars Jensen noted in a LinkedIn post recently that increases in the spot rate levels in the build up to Chinese New Year could be explained by the normal seasonality effect. 

The dramatic decline in prices comes as buyers are tapping into the initial supply of global VLSFO, which Adrian Tolson, a bunker market veteran and director at consultancy BLUE Insight, said appears sufficient, for now. 

“Generally speaking, there seems to be a pretty good supply of low-sulfur [fuel] around, and that’s reflected in the prices,” he said.

Maersk imposed its Environmental Fuel Fee (EFF) and quarterly BAF with the levels, similar to Hapag-Lloyd’s MRF, subject to a monthly review. An adjustment would be triggered if the price of compliant VLSFO moved up or down significantly during the quarter. “Significantly” was defined by Maersk as a change of more than $50 per ton, either up or down, on bunker prices compared with the last time the two surcharges were adjusted in December.

IMO secretary-general Kitack Lim said he was pleased with the transition by the shipping industry to the 0.50 percent cap on sulfur emissions. In a review of the IMO 2020 implementation, he said the organization was now focused on the next target, the enforcement of the so-called “carriage ban,” which from March 1 will prohibit vessels that do not have scrubbers installed from carrying non-compliant fuel.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.