A number of regulatory challenges will test container shipping lines in the coming year while the increase in the price of fuel will focus minds further. There is a definite probability that costs will increase, but rates may not match those increases.
One such challenge will be the Sulfur Cap. The International Maritime Organization (IMO) has imposed a limit on the sulfur content of marine fuel of 0.5 percent that begins January 1, 2020 (commonly known as IMO 2020). This will cause ship operators to either fit scrubbers to clean the exhaust, thereby allowing them to continue burning lower cost heavy fuel oil, or to use more costly low sulfur fuels.
According to Danish Ship Finance’s Shipping Market Review there is no uniform strategy that is being employed by vessel operators to meet the challenges posed by IMO 2020.
“Owners are considering solutions ranging from newbuilding units equipped with LNG [liquid natural gas] engines, to utilizing blended low-sulphur fuel or retrofitting existing vessels with scrubbers. Each option has its pros and cons. While the first two options are applicable for all vessel sizes, retrofitting with scrubbers makes more economic sense for larger and younger vessels, assuming significant fuels price spreads from 2020 onward,” said the review.
Both the LNG and scrubber options are costly options, with LNG seen as an option only for new vessels, while the capital cost for a scrubber is estimated at $2 million per ship. Operating on distillate (low sulfur) fuel would not carry the requirement for a capital injection but would increase operating costs substantially and it is this option that most owners have opted for.
In part his has been because there is a surplus of tonnage which can be mitigated through slow steaming – by slowing vessels down the capacity decreases and can be raised by adding a vessel to a trade lane.
The effect of slowing vessels down could force shippers to alter their supply chains, because the actual time for their inventory to reach the market could be increased.
Even so, operators may be further forced to add vessels to their services as the current block exemption on maritime alliances is also due to expire in 2020. The exemption that allows shipping lines, whose combined market share is less than 30 percent to jointly operate services through alliances, is due to expire in April 2020.
Through their associations, many shippers are arguing strongly against the exemption’s renewal. If it is not renewed, operators will need to deploy more tonnage in order to operate the services at current levels.
“This could trigger a new wave of newbuilding orders. Consequently, the competitive landscape for liner operators would intensify and the industry could spiral into severe overcapacity,” said Danish Ship Finance.
In its Maritime Trends Report from 2018, Danish Ship Finance also pointed to the challenge posed by disruptive technology that will see new operators enter the market. In the future, the importance of shipping freight rates could be “marginalized” as new operators with a vision across the supply chain enter the market.
The Market Trends report argues, “Freight rates could decouple both from the supply and demand balance and from vessels’ operating expenses. A possible scenario is that freight rates approach zero or stabilize at transaction-based low levels. In the event of this, second-hand prices of vessels will depreciate over time, leaving little room for asset play, which currently represents a large part of value creation for many shipowners.”
Digitalization in the supply chain is clearly at an early stage, Danish Ship Finance concedes, but when digitalization begins it grows exponentially; at a low level to begin with and then at an accelerated rate.
“Let us illustrate the point with a Moore’s law example. Starting with a market share of 0 .01 percent and doubling each year, it will take seven years to pass 1 percent but only another seven to reach 100 percent,” says the Maritime Trends report.
Or to put it another way, if the digitalization of the supply chain was at 0.01 percent at the end of 2018, by 2025 it would have a market share of just 1.28 percent, but by 2030 the market share will be over 40 percent.
Ships in this new industrial panorama will still be necessary to move cargo, but the income they generate will be marginal for the new industry players, who will be looking at “monetizing” the data from the entire supply chain.
In this new world the asset owner remains a small link in the chain, literally, while the new players will disrupt the traditional owners using the valuable data.
“These newcomers may start to upgrade specific parts of the supply chain or the entire customer journey without owning a single asset. The separation of data from the asset opens up a wide range of new possibilities in terms of business models and value creation. It will change the borders of industries, the role of assets and introduce new groups of competitors that are not normally considered in this competitive landscape,” said the Maritime Trend Report.
Digital challenges pose an existential threat to traditional asset owners all along the supply chain and although the threat remains small now and will still be small in 2020, the time to act is now because in 2025 it will already be too late.