Taxonomy: BlueWater Reporting Analysis

Choppy seas on horizon for liner carriers

BlueWater Reporting forecasts more headwinds than tailwinds in the coming months.

Choppy seas on horizon for liner carriers

BlueWater Reporting forecasts more headwinds than tailwinds in the coming months.

Choppy seas on horizon for liner carriers

BlueWater Reporting forecasts more headwinds than tailwinds in the coming months.

 
In the wake of liner carriers posting financially brutal second-quarter 2018 results, the future continues to look filled with troubled waters.
    During the second quarter of the year, carriers primarily attributed their weak financial results to higher bunker costs and lower spot rates compared to the same 2017 period.
    The global average bunker price of intermediate fuel oil (IFO) 380, which is largely used among liner carriers, totaled $485.50 per metric ton as of the end of June, up from $328.50 per metric ton a year earlier, according to Ship & Bunker.
    Additionally, the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI), which measures spot rate estimates from Shanghai to 13 regions around the world, stood at a reading of 821.18 at the end of June, down 10.6 percent from a year earlier. However, Drewry’s World Container Index (WCI), which measures spot rates on eight prominent trade routes between Asia, Europe and the United States, clocked in at $1,378 per FEU during the last week of June, down 0.2 percent year-over-year.
    Looking ahead, carriers can expect their earnings over the next year or two to potentially be bogged down by challenges from the International Maritime Organization’s (IMO) impending sulfur cap, global trade headwinds and the never-ending struggle in achieving the right balance between supply and demand.
   On a bright note, containership demolition is expected to pick up again in 2019 after softening this year, and although volumes may weaken between the United States and China, the trade war between the two nations could potentially redraw trade patterns rather than lead to less overall volumes across the globe.

Stacking Up. The chart below illustrates that the liner carrier industry saw a lot more red ink in the second quarter of 2018 compared to a year prior. The second quarter of 2018, which ended June 30, was referred to as the first quarter of fiscal year 2018 for Japan’s Mitsui O.S.K. Lines (MOL), Nippon Yusen Kabushiki Kaisha (NYK) and Kawasaki Kisen Kaisha (“K” Line). Currency conversions to U.S. dollars were as of Oct. 2.


Click to enlarge image

    Although the Danish shipping conglomerate A.P. Møller – Maersk recorded a profit of $26 million for the quarter, compared to a $264 million loss a year earlier, its ocean segment posted a 23 percent year-over-year drop in earnings before interest, taxes, depreciation and amortization to $674 million.
    Meanwhile, Evergreen, Hapag-Lloyd, “K” Line, MOL, NYK and ZIM all managed to fall into the red during the quarter after posting profits a year earlier, while Hyundai Merchant Marine (HMM) and Yang Ming sank deeper into the red, and CMA CGM posted a significantly weaker profit.
    COSCO Shipping Holdings did not post financial results for the quarter; however, it did record a profit of 769.1 million Chinese yuan renminbi (U.S. $112 million) for the period from Jan. 1 to June 30, down from a profit of 3.4 billion Chinese yuan renminbi for the first six months of 2017.

Treading Through Sulfur Cap Challenges. Global average bunker prices for IFO 380, IFO 180 and MGO have all increased over the last two years, as illustrated in the chart below, which was constructed using data from Ship & Bunker. IFO 380 and IFO 180 currently have a maximum sulfur content of 3.5 percent and include RME, RMF, RMG, RMH and RMK, while MGO, unless otherwise specified, is a clear and bright distillate (DMA or DMZ) with a maximum sulfur content of 1.5 percent, according to Ship & Bunker. The chart illustrates global average bunker prices in U.S. dollars per metric ton for the beginning of each September from 2015 through 2018.



    Adding fuel to the fire, the IMO’s 2020 sulfur cap will likely cause bunker prices to climb even higher. The sulfur cap, which will kick into gear on Jan. 1, 2020, will lower the global limit for sulfur in fuel oil used on board ships to 0.5 percent. The interpretation of “fuel oil used on board” includes use in main and auxiliary engines, as well as boilers, according to the IMO.
   The current limit for sulfur content of ships’ fuel oil is 3.5 percent, with a limit of 0.1 percent in emission control areas (ECAs). Under the 2020 sulfur cap, ECAs will continue to have a global sulfur cap limit of 0.1 percent.
    The IMO’s Marine Environment Protection Committee in October 2016 decided that the 0.5 percent limit should apply from Jan. 1, 2020. The IMO argued that the 2020 sulfur cap “should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”
    Carriers have three options to comply with the 2020 sulfur cap: using marine oil with sulfur emission of no more than 0.5 percent, installing scrubbers to old or new ships or using ships that are fueled with liquefied natural gas. Regardless of what option carriers choose, it will cost them a pretty penny.
    The cost of low-sulfur fuels is about 50 percent more than the cost of residual fuel, which is currently the most commonly used fuel by ships today when operating outside ECAs, according to the International Chamber of Shipping (ICS). The use of LNG and scrubbers is predicted to rise, especially after 2020, but for the immediate future, the use of these latter two methods of compliance will only involve a small percentage of the global fleet, with the vast majority of ships expected to comply in 2020 using fuel oil with a sulfur content of 0.5 percent or less, ICS said.
    Hapag-Lloyd said in August that oil industry experts estimate that 0.5 sulfur “low-sulfur fuel” will be $150 to $250 more expensive per ton than the current 3.5 percent sulfur “heavy fuel oil.”
   According to this estimation, this will raise global average prices per TEU by about $80 to $120, or around 10 percent, Hapag-Lloyd said.
    “Low-sulfur oil bunkering will have to start in the fourth quarter of 2019 due to the long round voyage times, which will mean higher costs for customers already by the end of the year,” Hapag-Lloyd said.
    Although scrubbers have been used with cruise liners and short-sea ferries, they have not been used with large containerships. Additionally, there is the risk regulations could change in the coming years and prohibit flushing the pollution into seas at all, Hapag-Lloyd said.
    There also are many limitations to how many ships can be retrofitted with scrubbers or converted to LNG, and it also takes time to build new ships fitted with scrubbers or designed to burn LNG, Hapag-Lloyd said, adding that the vast majority of the global container fleet will therefore have no other choice but to switch to the new, much more expensive low-sulfur fuel.
    Additionally, since there is little demand for marine LNG, there are currently only a small number of LNG bunker vessels available in a few ports, according to Hapag-Lloyd.
   “According to industry estimates, more than 90 percent of the global vessel fleet will be relying on compliant fuels when the sulfur rules step into force on January 1, 2020,” Maersk said in September. “This will also be the case for Maersk Line’s fleet, despite a recent investment in a limited number of scrubbers.
    “Based on expected differences in price between current 3.5 percent bunker fuel and compliant 0.5 percent fuel, external sources estimate the additional cost for the global container shipping industry to comply could be up to $15 billion,” Maersk said, adding that it expects that its extra fuel costs could exceed $2 billion.
    Maersk plans to implement a new bunker adjustment factor (BAF) surcharge to recover increases in fuel-related costs, which will be charged separately from its freight rate.
    The BAF, which will be introduced Jan. 1, is replacing Maersk’s current standard bunker adjustment factor (SBF) surcharge.
    Maersk’s BAF consists of two key elements, the fuel price, which is calculated as the average fuel price in key bunkering ports throughout the world, and a trade factor that reflects the average fuel consumption on a given trade lane as a result of variables like transit times, fuel efficiency and trade imbalances between head-haul and backhaul legs.
   MSC announced in September that it is introducing a global fuel surcharge on Jan. 1 that will replace existing surcharge mechanisms. The new surcharge “will reflect a combination of fuel prices at bunkering ports around the world and specific line costs such as transit times, fuel efficiency and other trade-related factors,” the carrier said.
    Meanwhile, CMA CGM said in September that it has decided to use 0.5 percent fuel oil for its fleet; use LNG to power some of its future containerships, which it currently has nine on order; and order several scrubbers for its ships. “All these measures represent a major additional cost estimated, based on current conditions, at an average of $160 per TEU,” the carrier said. “This additional cost will be taken into account through the application or adjustment of fuel surcharges on a trade-by-trade basis.”
    Wallenius Wilhelmsen said in August that it is “relatively well covered” through sulfur clauses already in place for a majority of its larger customer contracts and added that it aims to introduce “relevant clauses” for remaining customer contracts.
    Looking ahead, Rick Joswick, global head of oil pricing and trade flow analytics at S& P Global Platts, said it’s likely that by 2022, the base load fuel price will still be higher than it is today, but will be done spiking and will be much more normalized. This is because there will be more low-sulfur fuel, it will be tested and more accepted by then, and it will give refiners time to produce.

Navigating Through Trade Uncertainty. The liner industry has been seeing high demand from China to the United States in recent months from shippers moving their goods on this route as quickly as they can due to tariffs, although this high demand will likely be short lived.
As of September, 340,989 TEUs were being allocated each week from China to North America, while 314,521 TEUs were being allocated each week from North America to China, as illustrated in the chart below, which was constructed using data from BlueWater Reporting.



    The SCFI stood at a reading of 909.74 on Sept. 14, up from a reading of 774.6 on Sept. 15, 2017, largely fueled by spot rate hikes on trades from Shanghai to the U.S. West Coast and U.S. East Coast, as illustrated in the chart below. These two trades collectively hold a 27.5 percent weight on the overall index, while the Shanghai to Europe and Mediterranean trades collectively hold a 30 percent weight on the overall index.



   Meanwhile, Drewry’s WCI had a composite reading of $1,725 per FEU on Sept. 20, up 25 percent year-over-year, largely fueled by spot rate increases from Shanghai to Los Angeles and Shanghai to New York, as illustrated in the chart below.



    Despite spot rates being higher year-over-year, the year-to-date average composite index of the WCI stood at $1,459 per FEU as of Sept. 20, which was $57 lower than the five-year average, Drewry said.
    On July 6, the United States implemented a 25 percent tariff on goods from China totaling $34 billion in annual import value, and on Aug. 23, the U.S. implemented a second tranche of 25 percent tariffs on goods from China with an annual import value of $16 billion. China immediately retaliated after both rounds by implementing a 25 percent tariff on the same value amount of U.S. goods.
    On Sept. 24, the United States implemented tariffs on goods from China with an annual import value of $200 billion. The tariff on this third tranche of goods totals 10 percent until Jan. 1, when it will then increase to 25 percent. Consequently, China retaliated to the tune of 5 percent to 10 percent tariffs across $60 billion worth of U.S. goods, starting the same day as the United States’ third round of Section 301 tariffs, according to a translation of an announcement from the Chinese Ministry of Commerce.
    The U.S.-China trade war most likely will dampen box volumes between the two nations, considering data from the U.S. Trade Representative shows that China was the United States’ third-largest goods export market in 2017 and the United States’ largest supplier of goods imports in 2017. U.S. goods imports from China totaled $505.5 billion in 2017, while U.S. goods exports to China stood at $129.9 billion.
   However, it’s still uncertain how much impact there will be on the transpacific trade overall. Kerry Logistics argued that the feud between the two nations is simply shifting trade patterns.
    “The ongoing trade spat between Mainland China and the U.S. is reshaping trade routes and global supply chains,” Kerry Logistics Chairman George Yeo said in August. “While the trade volumes between the two economies is expected to reduce in the near future, certain markets in Asia are likely to benefit conversely from the increased intra-Asia trade as customers look for alternative supply sources beyond Mainland China and the U.S. Moreover, Asia has been experiencing the fastest trade volume growth for both imports and exports, driven by rising domestic consumption and increased investment.”
    William Ma, Kerry Logistics Group managing director, said in August, “The China-U.S. trade dispute has caused manufacturing capacities to shift from Mainland China to other Asian countries, bringing about an increase in shipping volume and production activities in Asia. Southeast Asia, in particular, has enjoyed the fastest growth in the region.”
    It appears growth in global volumes may start to dim, considering the World Trade Organization projects merchandise trade volume growth will slow between 2017 and 2018, as well as between 2018 and 2019. Merchandise trade volume growth clocked in at 4.7 percent in 2017, and the WTO expects merchandise trade volume growth to total about 4.4 percent for 2018 and 4.0 percent for 2019. However, the WTO said in April that a continued escalation of trade-restrictive policies could lead to a significantly lower figure.

Striking a Balance. The looming threat of overcapacity also could put a wrench in carriers’ earnings. Clarksons Research’s August issue of Container Intelligence Monthly shows that 52 vessels of 15,000 TEUs or more are currently on order. These larger vessels will cause a ripple effect in higher average vessel size across various trades.
   


   Average vessel size on the Asia-North Europe trade stood at 14,502 TEUs as of September, up 5.3 percent from 12 months prior, as illustrated in the chart above, which was constructed using data from BlueWater Reporting. On the Asia-North America trade, average vessel size was 8,079 TEUs in September, up 3.6 percent year-over-year.
    For 2017, container trade growth of 6 percent surpassed containership capacity growth of 3.8 percent, according to Clarksons Research. However, the firm projects that for 2018, container trade growth will total 5.3 percent, while total containership capacity growth will come in at 5.7 percent.
    Containership demolition for 2018 is expected to be just 84,200 TEUs, much lower than 398,600 TEUs in 2017, 654,400 TEUs in 2016 and 197,200 TEUs in 2015. However, containership demolition is expected to pick up again in 2019, when 164,500 TEUs of containership capacity are expected to be scrapped, according to Clarksons Research.
We’re pleased that port-related projects garnered nearly a sixth of the total amount in this round of BUILD. The $229-plus million in port-related awards will help leverage nearly $412 million in total project costs.
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