Encouraged by the sticking of interim low-sulfur surcharges last week — as reflected by a bump in Asia-US spot rates — carriers and forwarders say they are holding firm on not accepting cargo for post-Jan. 1 sailings unless shippers shell out for higher costs linked to the coming IMO 2020 mandate.
Carriers consider their ability to implement interim low-sulfur fuel oil (LSFO) increases of about $150 per FEU to the West Coast and $250 per FEU to the East Coast as an indication the trade recognizes that transportation costs will increase because of the International Maritime Organization’s global mandate. Carriers beginning Jan. 1 must reduce the sulfur content of bunker fuel to 0.5 percent, from 3.5 percent at present, or install emissions-cleaning scrubbers.
“We need the increases, and we need them to stick,” said Howard Finkel, senior vice president of trade at Cosco Shipping Lines.
If carriers aren’t able to fully recoup the higher costs tied to meeting the mandate, they’ll be forced to blank more sailings and even remove entire strings, or risk a sharp decrease in profitability. Estimates for how much the regulation will add to the container shipping industry’s annual fuel bill, its largest operating costs, range from $10 billion to $15 billion.
Forwarders and carriers tell JOC.com last week’s double-digit increases in eastbound trans-Pacific spot rates were due mostly to the fuel component of the all-in rate, as carriers successfully implemented interim surcharges ahead of the IMO 2020 implementation date. It's unclear, however, exactly how much of the 19 percent increase in the East Coast spot rate and 14.3 percent increase to the West Coast was due to the interim fuel surcharges.
Very low sulfur fuel oil (VLSFO) was assessed at $562.50/mt in Houston Tuesday, according to the Oil Price Information Service, a sister company of JOC.com within IHS Markit. With high-sulfur 380 CST pegged at $350/mt, that puts the current spread in the busy port at $212.50/mt, said OPIS. One month ago, the spread was $242.50/mt, with VLSFO approximately flat but high-sulfur fuel oil (HSFO) about $28/mt cheaper, according to OPIS data.
The nearly $30/mt gain in HSFO over the past month could be an indication of scrubber-related demand combined with lower supplies as refiners throttle back on high sulfur fuel output ahead of the IMO mandate.
Higher surcharges or rejected bookings
Freight forwarders, also known as non-vessel-operating common carriers (NVOs), say they are passing on the LSFO surcharge to beneficial cargo owners (BCOs), and are experiencing little, if any, pushback.
“This is a non-negotiable surcharge,” said David Bennett, president of the Americas at Globe Express Services. He compared the new shipping environment with what is commonplace for motorists each day. They don’t pull into their local gas station and fill up the tank with premium gasoline expecting to pay the lower price for regular gas, Bennett said.
The spot rate from Shanghai to the West Coast last week increased 14.3 percent to $1,405 per FEU. The East Coast rate increased 19 percent to $2,684 per FEU, according to the Shanghai Containerized Freight Index (SCFI), which is published in the JOC Shipping & Logistics Pricing Hub. Prior to that, the spot rate had dropped for three consecutive weeks.
Carriers said a slight bump in volumes on vessels leaving Asia may have contributed to the increase in spot rates. Factories in Asia will close for a week or two on Jan. 25 for the beginning of the Lunar New Year celebrations. Retailers and manufacturers normally ramp up their imports in late December before the plant closures, but volumes are already picking up because the Jan. 25 date is earlier than usual.
“Bookings with carriers are up across the board,” said Larry Burns, senior vice president of trade and sales at Hyundai America Shipping Agency. The numbers are anecdotal, but HMM’s origin-source bookings are up, he said. Burns said HMM’s bookings through the end of December look “solid,” with most vessels leaving Asia filling at 98 to 100 percent of capacity.
Kevin Krause, vice president of ocean services at SEKO Logistics, said its bookings began rising about nine days ago. “The activity is mostly from China, and it’s to both coasts,” he said.
LSFO surcharge drove most of spot rate hike
Nevertheless, carriers and shippers agree the interim LSFO surcharges effective Dec. 1 accounted for most of the increase in spot rates last week. Each carrier prices its services differently, but generally an all-in rate to the West Coast of about $1,450 per FEU reflects a base ocean carriage charge of about $1,100 and a fuel surcharge of about $350. An East Coast rate of $2,500 per FEU would include about $1,800 for ocean carriage and about a $700 bunker fuel surcharge.
Carriers and shippers agree that the base rate for ocean carriage has been depressed for much of the year, and it is not expected to increase much in the coming months as US imports from Asia are basically flat year over year, with no sustained increase in volumes anticipated. US imports from Asia in January-October increased 0.2 percent year over year according to PIERS, a JOC.com sister company within IHS Markit.
Based on the downward movement in spot rates during the first three weeks of November, it’s apparent there is sufficient capacity in the eastbound Pacific, said Christian Sur, executive vice president of sales and marketing at Unique Logistics International. Therefore, the all-in rate last week, including the LSFO interim charge, is still about what BCOs are used to paying based on freight rates in previous years, he said.
Rather than trying to prop up the base ocean rate, carriers are focusing more on their ability to make December’s interim LSFO surcharge stick, Sur said. They are preparing for January when all of their vessels will either burn higher-cost LSFO, or they will be operating with newly installed scrubbers. Although scrubbers remove enough sulfur to meet the 0.5 percent limit, they also come at a steep cost to install, and carriers intend to recover some of those upfront costs in the fuel surcharges. “Their priority is to get some increase in December,” he said.
Despite soft eastbound trans-Pacific demand this year, carriers have been able to balance supply with demand by blanking sailings. Burns said that in November and December, total eastbound capacity to the West Coast was reduced about 8 percent, with a 6 percent reduction to the East Coast. Right now, it looks like total capacity from Asia to the US West and East coasts in January will be down about 3 percent, he said.
It takes about one week to drydock a vessel, flush the high-sulfur fuel out of the tanks, and replace it with the LSFO. Some carriers have used the drydocking of a ship as an opportunity to blank a voyage that week. Some have replaced the drydocked vessel with a smaller ship from their intra-Asia fleet where freight rates are generally lower, but there is no discernible trend in the trade, Burns said.
After Jan. 1, with presumably all vessels in the trans-Pacific burning LSFO or using scrubbers, carriers are expected to seek a higher surcharge that reflects their growing operating costs. A logistics manager at a home furnishings retailer said the company negotiated with its core carriers an interim LSFO surcharge for December and January, and will pay a different surcharge beginning Feb. 1 based on the actual fuel costs of the previous month averaged over the major bunkering locations.