Economy - BIMCO Bulletin

Economy

ECONOMY December 2019 2020 freight rate negotiations will be as tough as necessary By Mette Kronholm Frnde, Communications Manager and Editor at BIMCO No shipping sector is capable of taking on such fuel costs itself. Costs are simply too high and must be passed on Freight rates are under pressure, global trade is hurt by trade wars, fleets are outgrowing demand and, if this was not enough, the price of fuel is about to take a leap, as the IMO sulphur regulation comes into force on 1 January 2020. Shipping companies are facing the toughest freight rate negotiations with their customers in years. As the industry prepares for the sulphur regulation to take effect in January, a combination of factors, from trade wars to weaker economy fundamentals, is putting shipping companies in a difficult position ahead of negotiations with clients and customers over freight rates that must compensate for a jump in the price of fuel. The whole shipping industry is already offering very cheap transportation on a global scale and nowhere are freight rates impressive. With an expected rise in bunker costs at the start of the year because of the new sulphur regulation, the shipping industry itself does not make the kind of money to absorb those extra costs and still remain profitable, or even break even, says BIMCOs Chief Shipping Analyst, Peter Sand. Come 2020, the fuel cost will simply be so much higher. It will be vital for shipowners and operators to communicate the need for customers to pay the extra costs the lions share of those costs from day one, says Sand. Can you make USD 4,000-16,000 dollars more per day? According to Marine Bunker Exchange (MABUX), the current spread between Marine Gas Oil and Heavy Sulphur Fuel Oil varies between USD 150 and USD 300 per metric ton, depending on the bunker port. If a ship burns 20 metric tons of fuel per day (the consumption of most small to medium ships) and, from January 2020, buys fuel that is USD 200 higher per metric ton than now, the cost will be USD 4,000 more per day. That cost must be recovered through freight rates to make the same amount as before 2020, when fuel costs were lower. The calculation goes for all ships in the fleet, including those that are being repositioned. If we then look at a large crude oil carrier or container ship, they can burn 80 metric tons per day, we are then looking at USD 16,000 per day that must be recovered to make up the additional bunker fuel cost, says Sand. No shipping sector is capable of taking on such fuel costs itself. Costs are simply too high and must be passed on. According to Sand, upcoming negotiations between shipping companies and their customers will be tough and not favour the shipping companies. Fundamentally, we are in a different situation now When do you, as a shipping company, have a strong negotiating position? Only in strong markets When do you, as a shipping company, have a strong negotiating position? Only in strong markets. It will be challenging, to be honest, because fleets seem to be growing faster than demand these years and it has been the case for all major shipping sectors in 2019. It is fair to say that 2020 will bring everyone more challenges, Sand says. It will be an enormous challenge, and I fear that we will be seeing many red figures for both container and dry bulk shipping companies at the start of the year. Sand points out that fuel oil prices have been elevated before, but market fundamentals were different then and, as a result, shipping companies were in a much better position to negotiate and pass on the higher fuel costs to customers. Five years ago, the world looked different; economic growth was much stronger, and we did not have a trade war. We had other underlying factors that certainly pointed forward with much stronger demand. All this is different today. Fundamentally, we are in a different situation now, says Sand. Photo (top): iStock / Suriyapong Thongsawang Read the market analysis and outlook from BIMCOs Market Analysis Team here. Connect with BIMCO Facebook Twitter Linkedin YouTube