Container growth demand outpacing new capacity, increased costs from low sulfur fuel, and new technologies that are reshaping the industry this year
On the heels of the industry’s most profitable year in nearly a decade, 2018 brought new challenges and stalled momentum for ocean carriers. The transpacific eastbound market, representing the Asia to U.S. trade, experienced an unusually strong peak season spurred by U.S. protectionist trade policy. American importers rushed to stockpile cargo ahead of multiple tariff increase deadlines on goods from China, resulting in a major capacity crunch between July and November. Ocean carriers were able to levy premiums on space during this period, but the gains were short-lived. Low contract rates negotiated in the spring prevailed for most of the year, making for a less-than-stellar annual performance overall. Slowing global economic growth, particularly in Europe and China, has once again left carriers searching for strategies to regain stability, if not profitability.
However, there are signs that the industry is learning from the past. Drewry is forecasting container demand growth of 4 percent in 2019, with supply set to increase by only 2.5 percent. Carriers have struggled with this balance for years, only recently making significant cutbacks on new ship orders. Over the last year, they have also coordinated to strategically reduce capacity in the market by combining services and utilizing blank sailing programs to drive up rates. These tactics have proven effective, so much so that they are being employed during the current annual contract negotiation season, typically a slow period, in an effort to maintain healthy rate levels for the coming year. Expectations in the market indicate likely rate increases in the double digits for the 2019-2020 contract year. As always, discipline in the area of rate negotiations will be critical to carriers’ success, especially in light of the sluggish global economy and recent U.S.-China trade developments that have alleviated tariff concerns for now. While the U.S. economy is stable, the National Retail Federation is forecasting a decline in imports for 2019. Coupled with an already struggling export trade, a U.S. economic slowdown over the next 1-2 years certainly seems possible, though far from guaranteed.
The wild card factor in this year’s ocean negotiations is the International Marine Organization (IMO) low sulfur fuel regulation which will require all ocean liners to reduce the content of sulfur fuel from 3.5 percent to 0.5 percent by January 1, 2020. This will impact all global ocean carriers and, therefore, all ocean shippers, to whom the increased cost of low sulfur fuel will be passed. Carriers are exploring options to comply with the IMO regulations, but one thing is certain: rates will increase significantly by the end of 2019. Current estimates range from $10 billion to $15 billion in overall impact to the industry. Shippers need to be prepared and factor an additional unknown per container cost into their annual freight projections.
Technology remains a vitally important factor in the management of international ocean shipments. Systems integration is becoming an essential tool for shippers who are closely monitoring each phase of the transportation process, customs compliance, and documentation. While Blockchain technology, once assumed to be a game-changer for the industry, has proven less effective than anticipated for this sector, new business intelligence tools are helping to reshape the value propositions within the maritime world. To reach the goal of complete visibility, service providers and shippers alike are placing great emphasis on digitalization. Major ocean carriers, such as Maersk, are exploring ways to streamline and integrate operationally, eager to provide a one-stop shop service model for managing the freight process from start to finish.
Visibility of the transportation and customs process provides substantial benefits to shippers of every size, offering a clear picture of reliability and bottlenecks in the supply chain. When combined with the partnership of a service provider who collaborates to identify efficiencies and develop solutions, the value of logistics technology increases exponentially. A strong relationship with a freight forwarder and customs broker who understands your logistics needs is as critical to your success as signing for the best combination of freight price and service. The devil is in the details, and navigating the complex world of international shipping efficiently requires experienced oversight at each stop of the journey.
For more information, please email Rachel Director, Pricing and Procurement at CV International, Inc., a freight forwarder, customs broker, and non-vessel-operating common carrier headquartered in Norfolk. She can be reached at .