eNews • February 7, 2019
Promoting a Cost-Effective, Reliable and Competitive Transportation System

Dual threats make 2019 pivotal for shipping

Jan. 1 dawned on what will likely become one of the most consequential years in a generation for container shipping. Old challenges are off the table, and new ones have replaced them.

Even with US longshore labor disruption rapidly becoming a distant memory, with long-term contracts now in place covering all three coasts, and a wave of carrier consolidation now largely realized, containerized supply chains are susceptible to disruption far out of shippers' control.

Chief among them is the impact of the International Maritime Organization (IMO) mandate, effective Jan. 1, 2020, for marine fuel to contain a maximum of 0.5 percent sulfur content on a global basis, down from 3.5 percent today. Coming in close to the top threat is the uncertainty of the future of the US-China trade war.

In terms of the IMO rule, the industry has never before faced a regulatory mandate with more potentially disruptive impact, and there is little to no possibility that it will be postponed or rolled back before the Jan. 1 implementation date.

How the IMO rule will play out in the market is still uncertain as the year begins, but it looms large. Multiple factors will impact how the scenario unfolds. One is how successful carriers are in passing the higher fuel costs along to customers, something they have a historically poor track record in achieving.

This will depend less on pricing discipline, for example, insisting on fuel charges in negotiations with shippers, and more on how well positioned the carriers are relative to customers in terms of supply and demand, as well as how well the carriers are performing financially.

The 30 percent plunge in crude prices since early October (as of Jan. 9) is an unexpected bonanza for container lines. Adding to the positive environment for carriers as the new year gets under way is a strong spot rate market in the second half of 2018 that so far is carrying over into the early days of 2019. Current Shanghai-to-Los Angeles spot rates at $2,081 per FEU are 41 percent higher than a year ago, and current rates from Shanghai to New York at $3,223 are 31 percent higher than a year ago, according to Drewry.

Trans-Pacific spot rates

A slight uptick in rates since mid-December indicates that the robust spot market driven in the trans-Pacific by front-loading of cargo in advance of a since-postponed imposition of 25 percent tariffs on $200 billion in imports from China will continue through the early February Chinese New Year. Depending on how buoyant spot rates remain, and how conservative carriers are in vessel deployments, carriers could find themselves well-positioned heading into annual trans-Pacific contract negotiations that culminate May 1.

The risk for carriers in annual contract negotiations, whether in 2019 or any other year, is a weak spot market going into the annual negotiation cycle. Carriers have long prioritized the filling of their ships, and the risk in any year is that by prioritizing that over rate levels, contract rates and associated terms and conditions get driven downward, impacting carrier revenue for the next year, irrespective of where the spot market goes.

The looming IMO mandate makes the stakes especially high for carriers this year. A weak spot market in 2019 raises the possibility that carriers will compromise not just on rates but also on fuel surcharges. That is dangerous because it would set up the highly disruptive potential that expected higher low-sulfur costs (which container lines are highly exposed to since there will be few scrubbers installed on container ships) will spark financial panic among carriers late in 2019 or in early 2020, leading them to withdraw capacity en masse from the market, much like they did in 2010.

"Given the low level of readiness to comply with these regulations, the global shipping industry will undergo a disorderly and disruptive transition to the new environment in 2019," said A.T. Kearny, which is not alone in saying that.

But things would have to turn sour for carriers for that outcome to materialize. With carriers currently experiencing relatively strong spot rates and declining bunker fuel prices, with capacity discipline a hallmark of 2018, and, finally, with demand expected to weaken in 2019 but not substantially, it is arguably within carriers' control to not let the market run away from them.

According to Drewry, "We will see a softening of the global container port demand growth rate, down from an estimated 4.7 percent in 2018 to just over 4 percent in 2019 [although 4 percent is still very respectable and adds more than 30 million TEU to the world total]."

The wild card in this scenario, of course, is the US-China trade war. Recent indications suggest negotiators are making progress, but there is no guarantee President Donald Trump will agree to a deal. The more than 10 percent drop in the stock market since October and increasingly louder voices of protest from the US business community may or may not prompt Trump to agree to terms.

The dispute contributed to a 25 percent decline in US containerized exports to China in 2018 through November, hardly immaterial.

Source: JOC.com

The Soy Transportation Coalition is comprised of thirteen state soybean boards, the American Soybean Association, and the United Soybean Board. The National Grain and Feed Association and the National Oilseed Processors Association serve as ex-officio members of the organization.

Soy Transportation Coalition
1255 SW Prairie Trail Pkwy., Ankeny, Iowa 50023
Phone: (515) 727-0665 Fax (515) 251-8657
Email msteenhoek@soytransportation.org
Web www.soytransportation.org

Funded by the Soybean Checkoff