Carriers are in preparation for a significant increase in costs as they make the transition to a low sulfur fuel, something that is set to take place over the next two months. Some carriers find themselves reviving old pricing tricks to surf this problem, despite capacity withdrawals and increased vessel utilization rates.
Industry standards
The current volume has increased by roughly 6% year-over-year based on container trade statistics (CTS) data from January through August. Utilization for ships has increased during the same timeframe and rose from the mid-60s up to 88%. In spite of this, rate levels are unable to keep up.
There is a severe issue of rate-cutting happening which means that shipping lines won’t realize the full benefit of any capacity reductions going forward. Westbound capacity slots dropped by 1.4% in September, and this marks the first year-over-year decline for the year 2019. Analysts have stipulated that carriers are preparing for weak demand up the head, particularly for November.
Services are being pulled by some companies like HMM one week ahead of schedule because there has been weak demand, particularly in October. Since August, the spot rate for Asia and European shipping has weakened even more and hit the lowest point in over a year. Pricing as tracked weekly by shipping and logistics information shows that the price has dropped 20% compared to where it was last year.
What experts are saying
Experts are saying that currently, there are only three carriers that have announced increases for the Asia or Europe Lanes, and freight all kinds (FAK) increases specifically. Cosco shipping, for example, has announced rising rates, which is now $800 per TEU. Maersk Line is attempting to lift their prices as well up to $825 per TEU. That spot rate has not reached $825 since February. Unfortunately, that’s not all that is pending.
Starting in November Maersk line is increasing the freight all kinds rate level to $1,100. They are not the only company to do so. CMA CGM will increase theirs to $1,000. It is essential to understand that if either of those rates is reached, it will comprise the highest standards in well over one year. More importantly, such an achievement would be an indication of an increasing surge in demand well before the Chinese New Year.
Carriers have indicated more capacity discipline, specifically with blanked sailings. The sailing capacity is forecasted to decline by 2.2% for the fourth quarter compared to the European rate in the third quarter.
How shippers will be affected
With the sailing cuts, the increase in demand that could potentially take place will no doubt exert additional upward pressure on the rates that are currently being charged. The second half could be softer, but there’s no guarantee of that, and shippers are going to be affected. Not only are they going to be changed in terms of availability but primarily in terms of the cost. knowing that these increased rates are on the horizon, shippers are going to need to make adjustments accordingly and be as prepared as possible for the upcoming changes. These changes will no doubt make their way down to the customers, and shippers need to make preparations for this, slowly but surely adjusting prices throughout the supply chain and looking for other ways to save money.
Right now, the global outlook is weak. Manufacturers are painting a very cautious picture of demand going forward, especially for the next few months. The operating margins are razor-thin at this point and particularly vulnerable to any additional rate erosion or cost pressures. Shippers need to understand that this cost pressure is going to be most prevalent over the next two months, specifically as carriers make the switch to low sulfur fuel.
Shippers are making the switch because there will be a regulatory demand for it starting January 1st of 2020, and many shippers should note that carriers are making the switch ahead of that deadline. The fuel-related cost for shipping between Asia and Europe could double as carriers make this switch. The current fuel components that contribute to the TEU is $100 using traditional high sulfur fuel with a spot charter rate of $600. However, as fuel costs go up because of the low sulfur fuel requirements that fuel component is going to reach $187 per TEU. Again these rate increases are something that shippers need to be aware of and need to start planning for immediately. The problem is this is not a one-off event. This is not something that will diminish once the January 1st deadline passes. If anything, it’s going to get worse. The freight rates are going to be higher for the next few years as a direct result of these changes. Until a lower emissions fuel is found for the shipping industry at a significantly lower cost, shippers can expect to be forced into adjustments for higher transportation fees long-term.
