Trade wars and fuel surcharges are set to dominate container line conversations in the year ahead as the sector faces the twin challenges of slowing demand growth and rising costs.
At the time of writing, the first signs of a tentative truce have emerged from Washington and Beijing with the agreement of the ‘Phase One’ deal. Freight rates have largely tracked below last year’s figure for most of this year, with only a late rush at the end of the year, as carrier efforts to remove tonnage, combined with the effects of an early Chinese New Year and the introduction of low-sulphur fuel adjustment charges, lifted prices.
The most recent figures from Container Trades Statistics show demand growing at just 1% this year. Drewry has been forced to twice revise down its expectations for container port throughput for the year and the International Monetary Fund has put global economic growth at just 3%. In the past, when a multiplier factor could be applied to world GDP, 3% growth could have meant 6% or greater container freight growth. Even between 2011-2019, the multiplier effect has been 1-2. This year, it has fallen back to 0.3 as protectionism and a global slowdown affect growth.
Growth in container trade is projected to grow 4.6% annually until 2024. This will be partially driven by increased containerisation of cargoes. Oversupply of capacity is expected to remain over the next couple of years at least, leading to lower container freight rates and lower earnings for carriers. But this in turn increases the attractiveness of using containers, hence more cargo will find its way into boxes and support volume growth. The biggest potential for further containerisation is to be found in forest products and scrap metals, and partially completed, or knocked down, cars. Currently, the main commodities traded in containers are chemicals (20%), food & beverages (15%), consumer goods (13%) and forest products (11%).Volumes handled by ports increased by 5% to 789m teu in 2018, with ports China accounts for 31% of the volumes, followed by Southeast Asia with 19% and Europe with 16%.
But the introduction of the sulphur cap from January 1 means the container sector alone faces a fuel bill hike in the region of $12bn-$20bn. All lines have introduced some form of bunker recovery fee, but heading into 2020 the question will be how long industry discipline can be maintained. With slowing growth and fleet capacity that is continuing to grow, albeit more slowly than in previous years, slots still need to be filled. One of the consequences of IMO 2020 has been a large number of vessels coming out of the fleet to be fitted with scrubbers. These ships will be able to enjoy the lower price of standard heavy fuel oil, with current IFO380 bunker price dropping to just $255 per tonne compared with LSFO price of over $510 per tonne.
With consolidation for the most part completed, carriers have had to look elsewhere for their growth. Maersk got the ball rolling back in 2016 when it announced it would focus on being an integrated container logistics company. By offering factory-to-retailer services, carriers can become much more involved in the entire logistics supply chain and bring in valueadded services that rivals may not be able to offer. CMA CGM has followed suit in its own way, making a bold move to acquire CEVA Logistics for $1.6bn. While the integration of CEVA has dragged on CMA CGM’s results, the carrier has taken further steps, recently taking a stake in a delivery firm that will work with CEVA to deliver last-mile services.
Some critics point out that this is nothing new, and that carriers owning their own logistics functions is a phase that has gone in and out of fashion as long as there has been containerisation. And some carriers are still content to stick to their knitting, believing that differentiation can be made through offering better service, documentation and reliability. They are content with getting the port-to-port part right, rather than distracting themselves with door-to-door.
Source: Lloyds List