A new report from US-based analysts Alix Partners is the latest to predict that the impact of the IMO 2020 fuel regulations will have a severe impact on container line operators.
Warning that the expected cost of the 2020 sulphur cap will be around $3Bn on the Eastbound Transpacific (EBTP) and Asia-Europe routes alone and around $10bn for the container trade in general assuming the best possible scenario for availability of low-sulphur fuel oils, Alix Partners suggested that carriers will have to impose significantly higher fuel surcharges this year and beyond to maintain margins at even 2018 levels.
The report says that to a large extent, carriers’ financial fortunes depend on whether they will be able to recover any additional fuel costs through surcharges or whether they will have to bear at least a portion of those costs themselves. According to our analysis of large carriers that publish bunker adjustment factor (BAF) rates (tracked by maritime research consultant Drewry), carriers plying the Asia–Europe route in 2018 would have had to increase their BAF rates by 40%, or $270 per forty-foot equivalent unit (FEU), to achieve the same financial result; carriers working the EBTP route would have needed to increase of 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 realise recovery in a timely manner. Failure to do so will depress cash flow significantly
The report goes on to say that the industry’s leverage has risen to a debt-to- EBITDA ratio of 10.1 in the latest 12 months from 7.5 in 2017 and a recent low of 2.2 in 2010. The increase is the result of declining margins as well as increased borrowing by carriers taking on debt to finance acquisitions and fleet expansion. The global fleet’s capacity has increased to close to 23 million teus. Even as ships grow ever larger—the average vessel in the global fleet has increased by 2%, as measured in teu capacity, since mid-2018—scrapping activities have plunged. Braemar ACM Shipbroking reports that carriers scrapped only 120,000teu of capacity in 2018—less than 1% of the global fleet’s total capacity – the lowest volume of scrappage since 2011.
According to the report several liner operators are once again looking at acquiring third-party logistic services having mostly hived them off 15-20 years ago to concentrate on core service provision.
The report can be accessed here.