The global shipping industry experienced many challenges in the past year.  We began 2018 with trucking being a major pain point in the global transportation system, given new regulations surrounding Electronic Logging Devices (ELDs) and Hours of Service rules.  This is in addition to an already strained trucking marketplace characterized by driver shortages, limited capacity and rising rates.  But other important considerations in the global supply chain quickly developed, including a U.S. / China trade policy dispute and tariff threat, which dominated the news cycle and greatly affected shipping activity in Q3 & Q4, as importers rushed to get product in advance of increasing duties.

At a macro level, businesses are also confronted with recent volatility in global markets, the threat of a prolonged U.S. Government shutdown and other factors causing uncertainty.  Logistics and Customs compliance managers are dealing with a myriad of issues related to such uncertainty, and some others on the horizon such as the approaching deadline for reduced sulfur (marine) emissions from 3.5% to 0.5% by January 2020.  CVI stands ready to help clients navigate through this changing landscape with expertise, an accessible team of subject matter expertise and timely content & educational programming, such as our July webinar on Trade Wars 2018:  How to Avoid Becoming a Casualty.  Please don’t hesitate to consult with us on such matters.  Looking forward into 2019, we’ve got our eyes on the following trends and topics:

Driver Shortage

December 2017 saw the “soft” launch of the Electronic Logging Device (ELD) mandate, with strict enforcement on April 1, 2018.  The net effect limited the capacity of truck drivers through a 10% average decrease in drivable miles, amid a stronger economic growth than originally anticipated.  This limited capacity, which hit lanes of 500-800 miles the hardest due to the lack of flexibility in covering the duration of loads in a reasonable amount of time.  Truck drivers began to prefer picking up shipments that could be delivered in one day or freight with higher rates to cover a second day of travel time (Benzinga, 2018).  Mid-length hauls and “tweener” lanes continue to be positioned as the priciest of post-ELD setting.  The term “driver shortage” has been used frequently throughout 2018 although it’s estimated that the number of drivers actually increased by 1.9% from 2017 to 2018. Perhaps the rise was supported by a 12%+ driver wage inflation and increased demand last year (Barnes Reports, 2018).  This number is also expected to increase another 2% in 2019 (Barnes Reports, 2018).  The FMCSA continues to modify the ELD mandate to cover current issues from drivers’ reports, e.g. on-duty time of drivers using the current 100-air-mile short hail exemption; accounting for adverse driving conditions and 30-minute breaks, and split-sleeper time – possibly giving truckers more flexibility in deciding when to stop to rest (Benzinga, 2018).

IMO’s Low Sulfur Regulations

January 1, 2020 marks the start of the International Marine Organization’s (IMO) low sulfur regulations, requiring the global fleet to switch from 3.5% to 0.5% sulfur fuel.  To support planning for the change, the IMO will begin collecting fuel oil consumption data for all ships over 5,000 gross tons, beginning January 1, 2019.  The energy efficient requirements for vessel design are currently mandated and will continue to be tightened every five years to promote innovation and technical development (Nodar, 2018). Global shipping fuel costs are likely to rise by $24 billion in 2020. The demand surge of refined oil (which will require blending with low sulfur products like diesel to meet IMO regulations) by shippers will likely increase prices of everything shipped internationally – from appliances and goods, to gasoline, jet fuel and diesel. The demand for diesel is expected to increase by 5-7% (Macquarie Research, 2018). According to Macquarie Research, “Consumers of diesel or middle distillates (jet fuel) are likely to see relative price risk as diesel utilization reaches a multi-year high. Higher diesel costs and compliant bunker fuel costs will create an increased burden on almost anything that moves” (Macquarie Research, 2018).

Our customers will begin to see differences in charges as carriers transition to a low-sulfur fuel, or install scrubbers, leading up to IMO’s strict compliance date of January 1, 2020. The IMO Member States have agreed there is no ‘transition’ period after January 1, 2020 (International Chamber of Shipping, 2018). According to Knowler (2018), “Estimates on the cost of the container shipping industry meeting the mandate range from $5 billion to tens of billions of dollars, but container lines are uniform in saying that the higher operating expenses have to be passed to shippers.” A new BAF formula was introduced in October to help shippers determine increased fuel surcharges – an increase of 55 to 60% in January 2020 (Morley, 2018).  According to Morley (2018):

“Much of the extensive variation in BAFs is tied to the variability of two factors: the route on which the cargo moves and the price of fuel when the BAF is imposed. Maersk, CMA CGM, and Hapag-Lloyd have provided a different BAF for each of a range of fuel prices on different routes. Maersk’s BAF calculation also takes into account transit time, fuel efficiency, and ‘trade imbalances between head-haul and backhaul legs,’ to work out the fuel consumption, the carrier said in announcing its BAF program. Hapag-Lloyd, aside from fuel and route information, looks at vessel consumption per day, the number of sea and port days spent on the trip, and the volume of TEU shipped.”

According to Tirschwell, Journal of Commerce’s IHS Maritime & Trade senior content officer, (2018):

“The danger for BCOs is less that they will be forced to pay higher costs for ocean transportation but rather that the carriers will fail to recoup a substantial portion of the additional cost and be forced to take drastic measures like reducing capacity to drive rate levels up and recoup the added costs that way instead…The impact of the Trade War and early 2019 decisions by ocean-carriers on limiting capacity will play key roles in determining the relative strength of the market in the run-up to the May 1 deadline for most trans-Pacific contracts.

 

[Table 1: Estimated LSS range charge chart based on information from Drewry Maritime Research (Lyakhovetskaya, n.d.)]

Trade War Tariffs

Trade War tariffs certainly received their share of the 2018 shipping spotlight.  Companies operating in the U.S. / China import trade saw the most volatility, with a significant “push” to get goods out before higher duties were imposed.  A recent meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G-20 summit in Argentina led to a 90-day ceasefire agreement on tariff escalations while the sides negotiate a potential agreement.  After many months of anxiety, shifting trade routes, research into other sourcing possibilities and rushing to get product out of China, the shipping community is waiting patiently for more information to unfold as the next (March) deadline approaches.

Trade War Recap:

Resources:

International Chamber of Shipping (2018). Compliance with the 2020 ‘Global Sulphur Cap’. International Chamber of Shipping. September 2018. London: Marisec Publications.

Freight Waves (2018). Transport in 2018: The year that ELDs, the economy and the driver squeeze all came together (2018). Benzinga. Chatham: Newstex.

Kinahan, J. (2018). Trade Concerns Continue to Push Stock Market Lower. Benzinga. Yahoo Finance.

Knowler, G. (2018). Shipper Suspicions of Low-Sulfur Fuel Adjustment Costs Mount. Journal of Commerce.

Lyakhovetskaya, O. (n.d.). Low Sulfur Surcharge: High Confusion and High Costs. Transportation/Logistics. Shapiro.

Macquarie Research (2018). Crackin’ the IMO: 2020 Bunker Fuel Spec Change has Wide Ranging Implications. July 9, 2018.

Morley, H. (2018). Cost of Low-Sulfur Rule to Shippers Slowly Comes into View. JOC.

Nodar, J. (2018). IMO 2020 Marks the Beginning, not end, of Low-emissions Quest. JOC.

Tan, H. (2018). Shipping costs from China to the US have more than doubled as trade war sparks a ‘bonanza’”.CNBC.

Tirschwell, P. (2018). Low-Sulfur Fuel to Dominate Ocean Container Contracting. Journal of Commerce.

Worldwide Industry & Market Reports. (2017). 2018 Worldwide Local Freight Trucking Industry & Market Outlook. Bonita Springs: Barnes Reports.