Demand for container shipping in the transpacific was another major topic at TPM19.
The expectation that container shipping rates will increase sharply because of the International Maritime Organization mandate that ships operating globally use low-sulfur fuel (or clean engine exhaust with scrubbers) starting next January is a major topic of discussion at TPM19, the Journal of Commerce’s annual conference that focuses on the transpacific maritime trade.
The U.S. economy is expected to remain fairly strong and not enter a recession this year, said Nariman Behravesh, chief economist of IHS Markit. He expects U.S. GDP will grow between 2.3 percent and 2.4 percent in 2019 compared to 2.9 percent in 2018, even though trade seems to be slowing.
He said he expects economic growth will return to about 2 percent next year, saying the higher growth rates in 2018 and 2019 came about because the Trump administration tax cuts boosted demand temporarily.
That growth is due, in large measure, to the fact that the service sector of the U.S. economy is so large, about 80 percent of the economy, he said.
He noted that it appears some sort of trade agreement will be reached between the U.S. and China.
Bloomberg reported Tuesday that the tariff increases that had been threatened for Jan. 1 and then postponed now may be put off indefinitely.
Uffe Ostergaard, president of North America for Hapag-Lloyd, said that he expected demand for container shipping in the transpacific to remain fairly strong this year, even with the decline in U.S. GDP growth.
In 2018, he said, transpacific eastbound volumes grew 4.7 percent or about 1 million TEUs. Based, in part, on projections by some 20 top U.S. importers, including retailers, Hapag-Lloyd expects imports to grow around 3.9 percent in 2019.
Ostergaard noted transpacific volumes were strong throughout the second half of 2018, in part because of a decision by carriers to cancel three transpacific strings services at the beginning of the third quarter and a push by importers to move goods ahead of the threat by the Trump administration to increase tariffs on imports from China on Jan. 1 of this year.
Carriers met that demand by adding 17 extra loaders with cumulative capacity of about 130,000 TEUs into the trade.
He estimated the movement of about 150,000 TEUs of imports was shifted from the first quarter of this year to the fourth quarter of 2018. “That will somehow come out of volumes this year,” he said.
As it developed, those tariffs threatened for Jan. 1 were postponed.
Carriers have responded to that development as well as a seasonal decrease in traffic due to Chinese New Year by announcing 35 blank sailings through February and early March.
As a result, Ostergaard said, the transpacific has a “pretty good balance between supply and demand,” though he noted volumes will fluctuate seasonally and are expected to peak as usual in the third quarter of this year.
He said there are relatively few idle containerships, which may reduce the chances of additional capacity being deployed in the transpacific. In addition, he noted that the shipbroking firm Clarkson’s is projecting that up to 1 percent of the fleet may be out of service at any time this year as containerships are fitted for scrubbers or have fuel tanks cleaned in preparation for shifting over to the use of low-sulfur fuel.
While warehouse capacity is tight in many U.S. markets, Ostergaard said it is difficult to determine whether this is entirely due to shipments being “pulled forward” because of concerns about tariff increases or changes in distribution due to online sales.
Philip Damas, director of Drewry Supply Chain Advisors, said that his firm expected a continuing slowdown in global container growth in 2019 but that it would fluctuate from quarter to quarter.
He said in the transpacific, shippers face five major uncertainties around the impact of tariffs on trade; how much fuel prices will increase, especially with the new IMO low-sulfur fuel requirements coming into effect; when carriers will switch to low-sulfur fuel and start charging shippers for it; whether capacity in the transpacific will remain tight; and what will be “Donald Trump’s next tweet on the China deal.”
Damas told shippers that “the era of double-digit rate reductions” is over and that carriers are determined to raise freight rates.
While many shippers have not yet issued tenders for transpacific transportation for the upcoming contract year running from May 1 to April 30, 2020, Damas said shippers managed by his company have received round one bids that show double-digit increases. He did add that in a few cases shippers were able to reduce rates.
Carriers also are keen to maximize load factors on their ships, and Damas said there has been a huge increase in canceled sailings, which is a negative for shippers in terms of service.
He said shippers should be prepared for increased bunker adjustment factors in January because of the IMO mandate. Medium-size shippers moving between 10,000 TEUs and 50,000 TEUs per year can expect the IMO low-sulfur requirement may raise costs more than $1 million per year, said Damas.
He noted, however, the amount of bunker fuel increases will depend on the shippers lane mix and that intra-Asia shippers may see a smaller bunker fuel increase.
Damas said some carriers are no longer willing to offer fixed all-in freight rates because of the uncertainty of how much their fuel costs will increase because of the IMO 2020 low-sulfur fuel mandate. Those that will offer such rates may do for only six months.
A model for fuel surcharges developed by Seabury Marine in cooperation with Gemini Shippers Group looked at how much fuel costs might increase because of the IMO 2020 low-sulfur fuel mandate.
A report distributed at the TPM19 conference using the Seabury Model determined what the additional cost would be for an 8,500-TEU ship using cleaner marine gas oil instead of the residual fuel in use today, if the difference in cost is $200 per ton. For the 8,500-TEU ship “slow steaming” at 17 to 18 knots, the added cost of using the cleaner fuel is about $65.80 per TEU, if the headhaul shipper footed the entire added cost of using the cleaner fuel. For a 4,500- TEU ship, the amount would be $72.59 and for a 13,100-TEU ship, the amount would be $49.47.
Of course, there are a host of assumptions behind these calculations. They include a 42-day round trip with 32 days at sea and 10 days in port, the need to burn even cleaner fuel in an emission control area, 90 percent utilization of the ship for the headhaul and 40 percent of the utilization of the ship in the backhaul.
The report noted that carriers have announced different plans on how to split the added cost between headhaul and backhaul shippers. It said APL is planning to have headhaul carriers pay the full increase and Maersk is planning to have headhaul shippers absorb 70 percent of the increase and backhaul shippers 30 percent. Hapag-Lloyd will split the cost among all shippers moving laden containers.
