Big Challenges for Shipping Industry in 2020

Apparel and textile importers have spent the last year challenged by rising shipping rates and tight vessel space as cargo owners scrambled to bring in merchandise earlier than normal to beat an expected tariff rise on certain Chinese goods.

That tariff on $200 billion worth of imports, scheduled to increase from 10 percent to 25 percent on March 2, has been postponed while trade negotiators try to forge a possible agreement.

While importers worry about whether tariffs will rise or fall, they have another problem looming on the horizon.

Next year, shipping rates could skyrocket as a new regulation on bunker fuel goes into effect on Jan. 1, 2020. Known as International Maritime Organization 2020, or IMO 2020, shipping vessels will be required to use cleaner fuel with a lower sulfur content to reduce air pollution. This cleaner fuel costs about twice as much as the marine bunker fuel being used today and could lead to a temporary shortage in cargo-container vessels as shippers adapt.

The new regulation will cut the maximum amount of sulfur in bunker fuel from the current 3.5 percent to 0.5 percent, meaning the new bunker fuel will cost the shipping industry about $15 billion next year.

No one is sure how much of that will be passed on to customers, but estimates predict that shipping rates could jump $100 to $250 per 20-foot container.

The new bunker-fuel regulation was a hot topic at the recent Trans-Pacific Maritime Conference, held March 3–6 at the Long Beach Convention Center in Long Beach, Calif., and organized by the Journal of Commerce.

“Fuel prices will go up substantially and be passed on to the clients,” said Philip Damas, director and operational head at Drewry Supply Chain Advisors, a maritime-research consultancy. He was speaking on a panel addressing the container-shipping outlook for 2019 and beyond.

But the big question mark is how much of that fuel-price jump will actually be folded into higher cargo rates. Some felt that the shipping lines might try to absorb some of that cost to gain more market share. That would be particularly true of state-owned shipping lines such as the China Ocean Shipping Company, which don’t have to answer to private investors.

“What happens if one or two shipping lines break rank and don’t pass on their fuel costs?” asked Neil Glynn, head of European transport equity research and global transport research coordinator for Credit Suisse. “Do carriers break rank because of a lack of discipline or a market-share strategy?”

In all this confusion, one thing is certain. Shipping lines will be taking vessels out of operation while they make accommodations for the new fuel. Some shippers will be putting scrubbers—exhaust-gas cleaning systems—on their ships, which would allow them to continue to use high-sulfur fuel oil that is cleaned.

But adding scrubbers, which costs about $5 million to $10 million per ship, requires about four to six weeks of downtime to install. Maersk, the largest container shipping line in the world with a global market share of 17 percent, noted earlier this year that it will be investing in new scrubber technology on a limited number of its 750 container ships.

“About 1 percent of the container fleet will be out of service with tank cleanings,” noted Uffe Ostergaard, president, North America, of Hapag-Lloyd, the largest container shipping line in Germany. “These are things we foresee and will impact the supply-and-demand balance.”

At the same time, refineries will have to produce more low-grade sulfur fuel than in the past, which could take time, resulting in fuel shortages.

Experts are predicting that many cargo owners will accelerate their shipping schedules and bring in imports earlier than Jan. 1 to avoid higher shipping costs. “We could see another front-loading action to get ahead of the low-sulfur-fuel surcharge,” Ostergaard said.

This kind of front-loading activity was seen last year when importers rushed in container loads of merchandise to beat tariffs, resulting in a huge spike in shipping activity, which started in the third quarter of last year and continued into the fourth quarter.

In October, cargo-container volumes rose 13.6 percent over the previous year and set a monthly record when 2 million 20-foot cargo containers passed through the major ports in the United States. November was equally as busy with cargo-container activity up 14 percent.

“January is still quite robust with activity up 4 percent over last January,” Ostergaard said. “But we see that softening now.”

Still, the U.S. economy is expected to be on solid ground this year with the gross domestic product edging up about 2 percent. “We have heard that big retailers will have 3 percent to 5 percent growth in import activity,” Ostergaard said. “And we see a pretty good balance between supply and demand [of vessel space] but with seasonal factors playing in there.”