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Global Supply Chain: CEO of Container Carrier Says Sulfur Emissions Rule will Cause Some Carriers to Go Bust


Carriers have Shown they Cannot Recover Higher Fuel Costs from Shippers

June 13, 2018
SCDigest Editorial Staff

Our web site reported last week on new rules coming from the International Maritime Organization (IMO) that will mandate cargo ships reduce sulfur emissions either from moving to what will be more expensive low sulfur fuels or installing scrubber systems that could cost as much as $10 million each. (See Uncertainty Over New IMO Rules for Ocean Carrier Emissions, but One Thing is Clear: Shipping Costs are Headed Up.)

The IMO rules are scheduled to go into effect Jan. 1, 2020 - just 18 months away.

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"In the short term we will be closing down some services," Skou told the Wall Street Journal May 17th. "Overcapacity is the biggest defect" in the sector.

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That article also noted that either approach would likely send carrier costs rising sharply, ultimately raising rates for shippers.

Now, the CEO of one container carrier says the impact could in fact be cataclysmic for the industry.

"We're all going to go bust," Junichiro Ikeda, CEO of Japanese carrier MOL, told the UK's Financial Times last week.

Ikeda is worried container carriers would not be able to boost rates or fuel surcharges enough to mitigate the impact of the $300 per metric ton of extra cost of low-sulfur fuel oil.

He may have good reasons to be worried: carriers have generally not been very successful in their attempts to pass on extra fuel costs to shippers, with net loss of over $1billion in the first quarter for the industry this year, attributed in large measure price to a spike in oil prices and thus the cost of bunker fuel for carriers.

Ocean carriers initially announced surcharges to cover the cost of more expensive fuel consumed on some trade lanes, but these were ultimately absorbed into their freight rates, and thus lost in terms of being able to clearly recoup the actual increase in fuel costs.

Meanwhile, in the face on seemingly never ending overcapacity in the container shipping sector, several carriers are making service changes.

In an interview with Lloyd's List earlier this week, Diego Aponte, CEO of Switzerland's Mediterranean Shipping Company, said his company has "decided to go for more slow steaming, and will add vessels to current strings that we operate in order to improve punctuality."

By cutting ship speeds and adding an additional ship to a string, MSC believes it will have more time between port calls and be better able to maintain schedules.

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In addition, MSC will withdraw ships from unprofitable loops and that those ships can be repositioned to other trades.

Aponte said terminals are having difficulty handling megaships efficiently, resulting in delays.

"We believe that for our customers, it is more important to be regular and for ships to arrive on the published day of the week," Aponte said.

Statistics released earlier in the year by SeaIntel showed that industry-wide only two-thirds of containerships were arriving on time.

Aponte told Lloyd's List that MSC already has started to slow ships on services on north-south routes and that it has approached Maersk Line about making changes on their joint 2M network.

MSC's noted that while key focus is on improving the punctuality and reliability of its services, the MSC changes plans to make will help reduce fuel costs.

For example, if a ship has to speed up from its planned speed of 18-20 knots in order to get back on schedule, a lot of extra fuel is burned.

Meanwhile, about three weeks ago, Maersk Group CEO Soren Skou said that Maersk Line will cut back capacity and feeder services in an attempt to improve profitability – that after years of saying it would maintain market share at almost any cost.

"In the short term we will be closing down some services," Skou told the Wall Street Journal May 17th. "Overcapacity is the biggest defect" in the sector.

To cut back, Maersk will be returning some of its chartered-in fleet to ship owners, reducing its feeder services and channeling more volume to direct ports. The firm also confirmed that it has no plans to place new shipbuilding orders for at least the next year - unlike MSC, CMA CGM and HMM, which have all been ordering 22,000-plus TEU mega-ships for their fleets, adding to overcapacity.

In the end, ocean shipping rates simply stay at rock bottom rates for shippers.

How big an impact do you think the sulfur rules will turn out to be? Can the carriers ever reduce capacity? Let us know your thoughts at the Feedback section below.


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