The BOC Blast 333 – Shipper group Low-sulfur fuel to boost trans-Pac rates 25 percent

Shipper group: Low-sulfur fuel to boost trans-Pac rates 25%

Importers in the eastbound Pacific were warned Thursday by a large shippers association to expect at least a 25 percent increase in all-in freight costs next year after the International Maritime Organization’s (IMO’s) low-sulfur fuel mandate takes effect.

Additionally, beneficial cargo owners (BCOs) were told they should not expect carriers or freight forwarders to absorb any of the increased costs because the only other alternative would be further degradation of service, which many already consider to be barely acceptable.

Carriers will attempt to pass on to customers their total increased costs for fuel due to the IMO 2020 low-sulfur fuel mandate, and if they can’t, they will resort to service cuts, such as slowing vessels down even more to reduce fuel consumption, said Kenneth O’Brien, COO of Gemini Shippers Group.

“We don’t want [carriers] to absorb this cost because it will affect service even more,” O’Brien told an Auto Care Association webinar. “The idea of going slower seems almost impossible as the supply chain time is already extended.”

Under the IMO 2020 rule that takes effect Jan. 1, carriers must burn bunker fuel with a sulfur content of no more than 0.5%, down from the existing cap of 3.5 percent. They can attain this goal by burning higher-cost low-sulfur fuel blends or pay about $4 million to install a scrubber that would allow them to continue using cheaper high-sulfur fuel. While the payback time for scrubbers is estimated to be one to three years, scrubbers could become obsolete when the IMO is expected to announce regulations for greenhouse gas (GHG) emissions by 2023, Seabury Maritime noted.

Fuel accounts for at least 25 percent of the total freight rate in the eastbound Pacific.

Estimated LSFO surcharges for 2020 vary widely

Precisely projecting the ultimate cost impact of switching to IMO 2020-compliant fuel is difficult right now as carriers work out their formulas for next year, said Nikos Petrakakos, director and head of environmental innovation at Seabury Maritime. JOC.com’s conversations with BCOs and non-vessel-operating common carriers (NVOs) in recent weeks revealed that preliminary estimates they received from carriers produced a wide range of estimates: an additional $164 to $375 per FEU to the West Coast and $276 to $625 per FEU to the East Coast.

While (a smaller amount) might not appear to be onerous, a $130,000 increase in total transportation costs for a BCO who imports 1,000 containers a year could be a shock if a company’s C-suite is not forewarned, said auto parts industry consultant Steve Hughes. He urged logistics managers to immediately begin the discussion with their financial officers about what to expect next year in terms of increased freight costs. “Report this up the chain to the C-suite,” he said.

As they prepare for carriers to roll out the new fuel surcharges for 2020, BCOs must scrutinize the surcharges of all the carriers they do business with in order to decide how to apportion their freight for next year’s service contract negotiations in the spring, O’Brien said. If BCOs don’t do this, “Your core carrier in Q1 could become your high-cost carrier in Q2,” he said.

However, O’Brien warned BCOs not to expect that carriers will begin to absorb some of the added fuel costs and use that as a competitive tool to attract business. Carriers’ profit margins have generally not been strong, so they do not have much leeway to absorb increased costs unless they slash service levels even more, he said.

BCOs should also anticipate further pressures on fuel pricing in the coming decade as the IMO turns its attention to reducing greenhouse gas (CO2) emissions. “IMO 2020 is just a start,” Petrakakos said. The IMO has already stated it will aim for at least a 50 percent reduction in GHG emissions by 2050, he said.

Hughes said tighter environmental restrictions in the freight transportation industry is now the new norm. “Unfortunately, it comes at quite a cost,” he said.