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Global Supply Chain News: Here We Go – Maersk Line Announces Big New Surcharges to Compensate for Additional Low Sulfur Fuel Costs

 

Other Carriers will Surely Follow Suit, but Who will Pay in the End


Jan. 29, 2020
SCDigest Editorial Staff

SCDigest has written extensively on the concerns about huge new costs to container and bulk ocean carriers stemming from new rules on sulfur emissions from the International Maritime Organization (IMO) that went into effect Jan. 1.

The rules require cargo ships to either switch to new, much more expensive diesel fuel from the current high sulfur bunker fuel, or install scrubbers that will contain sulfur emissions, at a cost of several million dollars per ship.

Supply Chain Digest Says...

A day after the Maersk announcement, Shipping Watch reported that Hapag-Lloyd is also said to be considering a similar surcharge


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In Singapore, the price of low sulfur diesel is about $270 a ton more expensive than the previous bunker fuel. Marine gasoil can also be used, but is also similarly expensive.

That puts the costs of the new fuels about 20% above the bunker cost levels used to calculate previous surcharges.

Some have predicted financial havoc among already financially weak container carriers if they cannot pass on the new costs for fuel or scrubbers to shippers.

At the same time, some industry experts have warned shippers to well vet what could be fuzzy formulas for calculating a surcharge. (See Low Sulfur Fuel Surcharges will be Key Bargaining Point for Container Shipping Lines.)

The container shipping industry's largest carrier by capacity and volume, giant Maersk Line, is adding on hefty new surcharges in the face of the higher operating costs.

The fuel surcharges will be between $50 to $200 per 40-foot container, depending on the shipping lane, according to a notice on the company's website.

"Others will definitely take lead from Maersk and follow with their own surcharges," Rahul Kapoor, head of research at IHS Markit, Maritime and Trade, told Bloomberg.com. "It's still early days how higher fuel costs would have a meaningful impact on trade volumes."

However, Kapoor told Bloomberg he expects the costs levels for low sulfur fuels to decline over time, and with that surcharge levels from carriers.

The new fuel costs come at a time where – as seems perpetually the case – the supply-demand balance greatly favors shippers, driving rates lower. Global trade, which tracks container volumes almost in lock step, was up just 1% in 2019.

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 The analysts at Drewry shipping, for example, recently estimated the cost to ship a 40-foot container from Hong Kong to Los Angeles at $1,520 - 22% lower than a year ago.

"Container rates are under pressure," Per Hansen, an investment economist at stock trader NordNet, said in a recent research note. "If Maersk doesn't succeed in moving the extra fuel costs over to its clients and/or if Maersk doesn't get a reasonable return on its investments in scrubbers on selected vessels, there's only one left to pay the bill: the company and thereby the shareholders."

However, Maersk probably has the financial wherewithal to withstand such a financial hit. Other less capitalized and financial secure carriers might not make it or be forced to be acquired by another carrier if shippers don't absorb most of the new costs.

Others carriers are sure to follow Maersk's lead. For example, a day after the Maersk announcement, Shipping Watch reported that Hapag-Lloyd is also said to be considering a similar surcharge, though its surcharge amount has not yet been determined.

By some estimates, the addition annual costs for the cargo ship sector will be about $10 billion – so the financial stakes are high indeed.

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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