Questions remain over carriers’ ability to pass on 2020 sulphur costs

The climate agenda red tape that hits the global shipping industry in January 2020 poses enormous difficulties for liner shipping carriers. They need to work out whether they will be able to successfully pass on the higher fuel bill costs to shipper clients. The issue of rising costs will not only be decided by the spread between LSFO and HSFO and the methodology used in carriers’ BAF formulas. More importantly, the issue of costs will be greatly affected by the supply-and-demand picture next year amid a backdrop of rising economic and geopolitical uncertainties, a shipping conference is told.

News ID: 80442

Date: 13 October 2019 - 09:16

Leading freight forwarder Kuehne + Nagel is extremely cautious about securing long-term contracts into 2020 against a backdrop of high volatility in fuel prices.

SHIPPERS that have to build their 2020 box shipping budgets are probably scratching their heads over uncertainties about fuel prices.

The spread between high sulphur bunker fuel and the compliant fuel that meets the 0.5% sulphur limit next year remains uncertain — and the same seems increasingly true about the underlying crude oil price. The bunker adjustment factor is complex, varying from different formulas by different carriers. And the installation of scrubbers has further complicated the situation.

Kuehne + Nagel, a major freight forwarder that sits in between the cargo owners and carriers, has no simple answer for its customers.

“Simply because there’s too much volatility,” Arne Voller, the company’s seafreight director for South China Cluster, told the TPM Asia conference. “Carriers are applying too many different methodologies, because they are uncertain by themselves. They are also constantly changing their mind, weekly or fortnightly.”

To reduce its exposure to that unpredictability into 2020, K+N has already moved to sign only monthly contracts with shippers as opposed to the traditional quarterly deals, in particular for the long-haul trades such as Asia-Europe services, Mr Voller told Lloyd’s List.

His company is also not making any long-term commitment to the bunker price.

“We are not quoting any long-term bunkering. Every tender or any request that we respond to is going to have a clause that the price is going to be floating with the market,” he said.

Silvia Ding, senior vice-president and global head of ocean product at Maersk Line, the world’s largest liner shipping carrier, tried to alleviate the concerns.

She said the estimated prices for low sulphur fuel oils would be settled at somewhere between $500 and $600 per tonne next year, which is in fact lower than the level seen before when crude oil was traded at $100 per barrel.

“So actually, it is not a massive reset compared to what the customers had experienced previously.”

But it’s all uphill from now, as the low sulphur fuel oil price is widely expected to be $150-$200 more expensive than that of high sulphur fuel oil. More importantly, perhaps, the tension in the Middle East has made the pump price outlook less clear, despite the rising US output and slowing global economy.

A suspected terrorist attack caused an explosion and fire on an Iranian oil tanker off Jeddah, Reuters cited Iranian state media as saying today. That came just a few days after Saudi Arabia said its full oil production capacity will return by end-November following a September attack on some major facilities and a resulting short-lived markup of crude oil.

Even based on the current oil price, the cost related to the switchover to compliant fuel for the 2020 sulphur cap is still substantial — an additional $11bn fuel bill estimated by Drewry in its recent report. The consultancy added that the degree of compensation that carriers receive will dictate the level of supply disruption next year.

Ms Ding at Maersk said that her company had made lots of efforts to gain customers’ understanding about why and how the fuel costs should be passed on. And Maersk’s BAF formula was set up in the form of a two-way traffic system so that shippers can also benefit from a drop in fuel prices, she added.

“So whenever the fuel price comes down, we’ll also pass on the reduction in cost to the customers.”

But whether shippers will eventually foot the bill is not only dependent on the level of the fuel prices and the perfection of carriers’ BAF set-ups. It is essentially determined by market equilibrium, according to Parash Jain, head of the transport research at HSBC.

While the projection for short-term cargo demand and vessel supply appears relatively healthy, the rising geopolitical uncertainties, including the simmering US-China trade war, are obscuring the market prospects.

“Entering into 2020, if the demand falls of a cliff for a variety of reasons, then the inherent competition will kick in,” Mr Jain cautioned. “On the one side, you may put a bunker surcharge, which will capture all the fuel cost increase, but your base rate could come down to zero.”

Some shipping line executives argued in private that the current alliance structure with a more consolidated base would prevent the reoccurrence of that type of rat race, even if the trade conflicts escalate and dent the cargo volume next year.

However, carriers will start to feel insecure and consider lowering rates to increase capacity when vessel utilisation fell below 90% and inclined towards 80%, Mr Voller at K+N reckoned.

“But I think that’s the situation that our carrier partners will try best to avoid.”