Thematic Route

Weak global trade, rising fuel costs and persistently low freight rates have posed new obstacles for shipping companies in their pursuit of stability.

In the past, you could measure your confidence in the container shipping industry by the growing fleet size of shipping companies and the size of their ship orders.

Nowadays, those giant ships that serve the world's major trade routes seem more like reckless corporate planning and mileage monuments based on hope rather than reality than ever before.

From the slowdown of global trade to the rise in fuel prices, and then to the increasing disconnection between capacity and demand, container shipping companies are likely to face new challenges in the next two years. After nearly a decade of intermittent stabilization, their recovery prospects have begun to become unclear again.

The container shipping industry, which transports these goods filled with clothes, electronic products, manufacturing components and various consumer goods, is a pillar of world trade. However, with the successive introduction and implementation of stricter and more environmentally friendly laws and regulations, especially the upcoming IMO2020 global sulfur limit regulations, ships will be required to burn more cleanly. Of course, more expensive fuel will also impose an additional huge cost burden on shipping companies.

Although shipping companies may try to pass on approximately 10 billion US dollars of costs to shippers through various means each year, in order to retain customers, they will almost certainly have to bear some of these costs.

The goods transported by container ships are diverse, including clothing, food, furniture, electronic products and heavy industrial components. To put it bluntly, to some extent, the container shipping industry has promoted the development of globalization. Before 2008, the global demand for Marine trade transportation grew by 8% annually, while at that time shipowners spent billions of dollars ordering and purchasing more vessels.

Then what happened is known to all. There was an excess of capacity and freight rates dropped. At the current rate of new ship delivery, it would take at least two years to absorb the excess. This also means that while fuel costs are rising, on some larger maritime trade routes, freight rates may continue to hover below the break-even point.

With the slowdown of the Chinese economy and the escalating trade war between Washington and Beijing hitting exports, major shipping companies have lowered their full-year forecasts.

The CEO of Maersk Group, the world's largest container shipping company, said recently, "I don't understand why everyone is so optimistic about 2019. We clearly see that global economic growth is declining." We expect that the growth of container transportation demand this year will drop from 3.7% last year to 1% to 3%.

Maersk said that 2019 would face considerable uncertainty as there was a risk of further restricting global trade. It also stated that a regulation issued by the International Maritime Organization (IMO) aimed at reducing sulfur emissions from ships (the IMO2020 sulfur Limit Regulation) "will significantly increase fuel prices".

Some industry experts predict that the rules of the International Maritime Organization, which will come into effect early next year, will increase the fuel cost of ships by about one-third.

David Kerstens, a stock analyst at Jefferies LLC, predicted in a recent report that Maersk would be able to recover an additional $2 billion in fuel costs through fuel surcharges. However, from the perspective of the entire market, "irrational behavior in price competition will still play a key risk factor." It may trigger a fourth wave of industry consolidation and the elimination of some smaller Asian shipping companies with poor financial conditions.

Peter Sand, the chief analyst of BIMCO, the Baltic shipping union, also said that shipping enterprises need to find ways to pass on the high costs generated by burning low-sulfur oil to the upstream and downstream of the industrial chain. Otherwise, it will be another heavy burden on the container shipping industry.

Jeremy Nixon, the CEO of Japan's ONE Shipping Company, said in a recent interview with The Wall Street Journal: "The increase in fuel prices will be very large and it is inevitable that a fuel surcharge will have to be charged." We are trying to pass on the fuel costs to consumers, but we are not doing it very effectively.

It is now a crucial moment for these shipping companies to adjust freight rates and related additional charges. Negotiations are currently underway with the largest clients such as Walmart Inc., Home Depot Inc., Amazon.com Inc., and Target Corp. regarding annual freight contracts.

In a recent report, consulting firm AlixPartners LLP stated that in order to cope with the upcoming high oil prices, vessels on the major trade routes between Asia and Europe need to increase freight rates by 40% (more in the form of fuel surcharges) compared to 2018 (that is, an increase of $270 per container). The trans-Pacific route requires an increase of 33% ($150 per container) or more.

Shipping industry executives said that due to the uncertainty of clean fuel supply, the current price forecast of ship fuel is nothing more than a guessing game. When discussing the new sulfur limit regulations of IMO2020 at the Capital Link conference held in New York recently, Andreas Hadjiyiannis, the president of the Cyprus Union of Shipowners, said that This practice of the IMO is very bad and shameless, turning the shipping market and the transportation market into a casino.

He added, "It is' stupid and wrong 'to enforce a 0.5% sulfur content limit standard before ensuring the mandatory production of fuel that complies with regulations. The implementation of this process should be a gradual and phased one, and there are no constraints on which type of desulfurization equipment must be installed."

In addition, the ongoing trade friction deadlock between the United States and China also led to a significant increase in shipping volume in the second half of 2018. The reason was that enterprises temporarily advanced their order volumes in order to deliver goods before the tariffs. Although the current public opinion results show that the trade tensions between China and the United States have eased somewhat and the continued imposition of tariffs between the two countries has been suspended, the existence of instability remains an important puzzle for the shipping industry.

Maersk Scherren stated that apart from the tense trade relations between China and the United States, there were also trade conflicts in other places in 2019. Clearly, there is still a long period of discussion and negotiation between Europe and the United States.

The continuous imbalance between supply and demand in shipping will only increase uncertainty.

Braemar ACM, a shipping brokerage firm, predicts that the demand growth rate of container shipping will remain at a level of 2%-3% annually in the next four years, while the expansion rate of the fleet capacity has reached an average annual level of 5%. And about one third of these shipbuilding vessels are large container ships capable of carrying 20,000 TEUs.

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In 2013, Maersk was the first to order large ships. Subsequently, major container shipping companies followed suit and mainly deployed them on the Asia-Europe and Asia-America routes. According to the original idea, stacking tens of thousands of containers on one ship would help shipping companies save billions of dollars every year.

However, at present, these shipping companies are taking various measures to keep their inventories as full as possible to make up for their huge capital expenditures, but such practices are having an impact on the supply chain. For instance, shipping companies are cutting weekly frequencies and reducing port calls, which to some extent has affected the customer experience.

These ultra-large container ships are like the A380 in the aviation industry. They are too big, so they can only be placed on specific major routes.

Lars Jensen, the CEO of SeaIntelligence, said that Airbus SE is currently gradually ending its disappointing A380 passenger aircraft project. However, global container shipping companies are still deeply trapped in the large ship trap. Only a significant rebound in global trade can reverse the business decline brought about by large ships.

BIMCO has also expressed a similar view. In the coming years, the growth rate of container import demand in the European region will not exceed 2%, which means that long-haul routes in Europe, which aim to achieve scale advantages by using large vessels, may become more difficult if they do not slow down. BIMCO said that this pessimistic outlook seems certain to emerge in 2019, and if consumer behavior does not change significantly as it has in the past four years, this situation may persist.

In fact, for such a possible "storm" ahead, major shipping companies in the shipping industry have also issued early warnings and taken corresponding measures.

Cma CGM stated in its recently released year-end report that it will launch a new cost-cutting plan, with the goal of reducing costs by 1.2 billion US dollars.

At the recent TPM Container Conference held in Long Beach, USA, Maersk Scherren publicly introduced to the attending guests that Maersk has no intention of building larger vessels.