Home » 3PL/4PL, Breaking News, Maritime » IMO 2020 could inflate box carriers’ costs by $10B—report

The year 2018 was a turbulent year for the container shipping industry, but it might have been only a warm-up for 2019 as the impending IMO 2020 weighs on an industry struggling to generate sustained profitability, according to a new report from global business consulting firm AlixPartners.

The report, “2019 Global Container Shipping Outlook,” released February, says the International Maritime Organization’s (IMO) 2020 regulations, as well as trade disputes resulting in new tariffs and the UK’s impending exit from the EU, could rock the shipping industry throughout 2019.

“The implementation of the IMO 2020 regulations will pose a daunting challenge for carriers,” the report stressed.

It estimates that IMO 2020 regulations could cost the container shipping business as much as US$10 billion globally—and that cost could increase significantly in 2020.

IMO 2020 mandates sharp reductions in sulfur emissions from container ships beginning in 2020. This mandate will require carriers to either switch from cheap, “dirty” bunker fuel to more costly low-sulfur fuel oil (LSFO) or invest in scrubbers.

“This fundamental change to such a large component could make or break carriers’ margins depending on how successful carriers are in passing along fuel-cost increases,” said the report.

According to AlixPartners’ analysis, carriers plying the Asia-Europe route in 2018 would have had to increase their bunker adjustment factor (BAF) rates by 40%, or $270 per forty-foot equivalent unit (FEU), to achieve the same financial result. Carriers working the East-bound Trans-Pacific (EBTP) route would have needed to increase BAF rates by 33%, or an additional $150 per FEU.

“Carriers will have to impose significantly higher fuel surcharges in 2019 and beyond to maintain their margins, with no guarantee that those charges will stick or that they’ll be able to realize recovery in a timely manner,” the report stated. “Failure to do so will depress cash flow significantly.”

It also estimates that the new fuel rules could expose carriers to as much as $3 billion in additional costs on the EBTP and Asia-Europe routes alone, which account for about 20% of container-shipping trade volume.

“The industry as a whole could be looking at as much as $10 billion in additional exposure, based on 2018 prices. And if tight supplies of LSFO trigger higher prices, fuel costs could climb even higher, making the difficult task of cost recovery even more urgent,” said the report.

While urging carriers to be prepared to mitigate the effects of IMO 2020, the paper also has suggestions for the other industry players:

  • Forwarders and 3PL providers will have to navigate shifting currents in their industry. Independent forwarders may find themselves sidelined by carriers intent on supporting their own captive forwarding and logistics units. Every player in the sector will have to be vigilant to avoid being stuck with the bill for fuel cost recovery prompted by the implementation of IMO 2020.
  • Shippers can expect pressure from carriers seeking to recover their added fuel costs and improve profitability. Shippers along the EBTP route may benefit by holding off from locking in contract rates until volumes along the route subside following inventory buildups in anticipation of tariffs. Shippers that have in the past relied on forwarders to afford access to multiple carriers should keep careful watch of where those forwarders’ allegiances lie, given the number of forwarders that are now captives of one carrier or another.
  • Investors can expect to see higher multiples for 3PL and forwarding assets as strategic investors in the container shipping space scout for acquisitions. Financial investors should consider exiting any mature investments they hold in such companies.

Photo: Eduard47

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