The ramifications for the new rules from the International Maritime Organization mandating lower sulfur emissions from ocean freight carriers – both bulk and container – are likely to be large when the rules go into effect January 1.
But how big the impact will be on carriers and shippers depends on many factors.
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As we've reported a number of times, the new rules require that ships either use a low sulfur diesel fuel to power ships, versus the "dirty" bunker fuel in widespread use currently - or install very expensive scrubbers to take the sulfur out of a ship's emissions.
While some carriers are installing scrubbers, the progress is slow, and many others will choose to avoid or delay the implementation of scrubbers, which can cost in the $5 million dollar range per ship.
Most believe the new demand for diesel fuel will send the price soaring not only for the ocean shipping sector but truck and rail lines as well, as refineries globally play catch up to the added demand from ship owners.
No one is really sure what the impact will be, but at the recent CSCMP Edge conference in Anaheim, Paul Bingham of IHS Markit estimated that in the short term prices were likely to rise a significant 20%, before falling back a bit later in 2020.
Some pundits have also warned that container carriers, most already with weak finances, could be in real trouble if they cannot pass the high costs of fuel and scrubber on to customers - estimated at $13-15 billion anually. More bankruptcies could be possible under that scenario, as well as more acquisitions of weaker carriers by stronger ones.
One thing for shippers to consider is that carrier formulas for a new fuel surcharge appear to vary significantly across carriers. Attempts at a surcharge for scrubber costs are likely to be even more complex.
"You have to understand the math," one expert said at a recent panel discussion at CSCMP.
But ocean carriers have often struggled to pass fuel costs on to shippers, the analysts at Drury said this past summer. Complicating matters: over the past few years of mostly falling bunker fuel costs, many carriers signed "all in" contracts with shippers that included fuel costs.
Moving back to strong fuel surcharges with those customers may not be easy.
Another complicating factor: weakening container volumes, as the global economy slows.
With ship utilization falling – there have been a large number of cancelled sailings from Asia to Europe and North America in recent weeks – container carriers will have a challenge in how to approach rates and surcharges in contract discussions.
That even as the container shipping sector appears to be making some progress in its never-ending fight to maintain capacity discipline.
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 The analysts at Alphaliner estimate that global capacity next year will rise 3.3%, while demand will grow a bit less, at 3.1%. That compared with a capacity gain of 3.6% and volumes rising just 2.4% in 2019.
The megaships of 18,000+ TEU in theory should give the advantage to carriers with lots of them, as the giant ships use much less fuel per container than smaller vessels.
But that's only if the ships are nearly full – a growing challenge. With rates falling, carriers will have to decide if they want to discount fuel surcharge levels as well to keep or growth their businesses.
As usual in recent years, shippers will continue to have most of the power – and it seems likely they can push some if not a lot of the new fuel costs back on to the carriers – even if that does cause financial chaos at many lines.
Do you think container carriers will be able to pass on new fuel costs? ? Let us know your thoughts at the Feedback section below.
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