Shippers already suffer slings and arrows of poor schedule reliability, but ocean carriers may have little choice in meeting higher IMO 2020 costs.
Shippers may pay the price in less choice and lower reliability as the ocean freight industry games out the best way to operate under next year’s cap on the sulfur output of marine fuel.
The International Maritime Organization’s limit of 0.5 percent sulfur emissions from vessel fuel used globally could result in freight rates increasing 50 percent by some estimates as most ocean carriers will likely switch to more expensive distillate fuels.
The sharp increase in demand and price for those fuels, which is similar to diesel and heating oil, could even lead to President Donald Trump using executive authority to halt the U.S. from exporting diesel, further roiling global markets.
Executives at the major ocean carriers have been telegraphing to customers that the cost burden of the higher fuel costs will have to be shared through fuel surcharges. But ocean carriers have a poor track record of passing on higher fuel costs to customers. The next best option, then, is reducing vessel speeds, thereby using less fuel.
With ships going slower, ocean carriers are likely to make fewer port calls and rely more on shuttling containers on smaller vessels. “The logic being that as ships sailing speed is reduced and round voyages are extended carriers will drop ports from rotations to ensure that transit times to key points remain competitive,” said maritime consultancy Drewry in its latest container report.
Yet even now, ocean carriers are having trouble meeting current schedule reliability metrics and further changes may mean more shipper frustrations, according to market experts. During a panel discussion at the Journal of Commerce’s TPM 2019 conference, SeaIntelligence Consulting Chief Executive Office Lars Jensen said that last year only about one in three container ships arrived at their scheduled time in the trans-Pacific market.
“Reliability is appallingly poor to put it mildly, especially if you look at the trans-Pacific,” Jensen said. “There is a large element of frustration on the shipper side in terms of service quality.”
Jensen noted that ocean carriers previously argued that slow steaming allows for additional slack in the system that would allow ships to speed up or extra vessels be deployed in the event of weather or demand shocks.
In previous instances when ocean carriers introduced slow steaming on Asia-Europe and reduced vessel supply, “shippers were complaining that’s going to increase our transit times,” Jensen said. But ocean carriers argued “because we go slower, we now have a better chance to catch up so reliability will improve.”
But he said there’s no correlation between slow steaming and increasing schedule reliability. He said the only way shippers are going to be able to see improved service, particularly in 2020, is to pay higher rates.
“We are in a vicious cycle because the carriers say they are loss making so why should I spend more money? I can’t afford it.” Jensen said. “The shipper will say, your performance is appalling and I want a discount on the freight rate. But now the carriers are even more loss making. This is a negative spiral.”
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