Hong Kong Shipping Gazette article 23 October 2019 – reposted http://www.shippingazette.com/menu.asp?encode=eng 

INDUSTRY experts have raised fresh concerns over the container shipping sector’s ability to recoup higher fuel costs that stem from the International Maritime Organization’s (IMO) new regulation that ships use maritime fuel with a sulphur content capped at 0.5 per cent, starting from January 1.

McKinsey partner Steve Saxon said there was “some good and some cautious news” for carriers in the period leading up to IMO 2020. “The good news is there will be sufficient supply of low-sulphur fuel oil (LSFO),” he told delegates at the TPM Asia conference held recently in Shenzhen, reported UK’s The Loadstar.

“There will be some volatility in January, but very quickly this will come down to a moderate spread [the cost comparison with high-sulphur fuel].

“The caution I have is we’re less optimistic about the industry’s ability to push through the surcharges and BAFs [bunker adjustment factors] for the LSFO, and that’s because there are carriers with very different strategies and significantly lower cost bases,” Mr Saxon added.

For example, 2M alliance partners Maersk and Mediterranean Shipping Company (MSC) have taken a near-opposite approach, the former choosing to switch to LSFO and the latter investing heavily in scrubbers.

“With the oversupply, carriers with scrubbers may look at it as an opportunity to win market share,” Mr Saxon said.

HSBC’s global head of shipping and ports equity research Parash Jain pointed out that the fuel price was expected to increase to levels similar to those in 2011.

“So, it comes down to whether they can pass costs on, and that depends on supply and demand,” he said.

“Come 2020, if demand should fall off a cliff, then the inherent competition will kick in and, on the one hand, you have a surcharge to capture all the fuel increase, but then your base rate could come down to zero.”

IHS Market’s vice president Rahul Kapoor was more optimistic. “The container shipping industry has been subsidising its customers,” he noted. “IMO 2020 and mergers and acquisitions have played into the hands of carriers. Over the next few years, my view is that freight rates will be higher.

“Carriers have shown they can control weekly capacity better than before. We’re in a bad demand scenario and freight rates are still breaking even.”

Some 50 containership with a capacity of 22,000 TEU or above are slated to enter service within the coming three years, meaning the container shipping industry remains “very challenged”, according to McKinsey’s Mr Saxon.

“Carriers have got better at managing weekly capacity, with more voids, faster changing of services and more layups, but those ships still exist and that is latent supply which is going to hold back any significant increases in freight rates,” said Mr Saxon.

“There’s a lot of ships out there still in search of cargo and, with the lower demand growth we’re seeing now, together with new ship orders, it doesn’t make us terribly optimistic that the supply and demand balance is going to be favourable.”