Container shipping industry braces for impact of new regulations

Container shipping industry braces for impact of new regulations

Price competition could lead to further consolidation.

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March 4, 2019

“These days, the hulking megaships that serve the world’s biggest trade routes look more than ever like monuments to brash corporate planning and projections built out of hopes rather than reality,” writes Costas Paris in a March 4 article in the Wall Street Journal.

He cites slowing global trade, fuel prices that could increase “sharply” as regulations that call for cleaner ship fuels go into effect and capacity that is misaligned with demand as issues the container shipping sector is facing over the next two years.

“Estimates are that shipping companies will try to pass on to cargo owners about $10 billion a year in combined additional expenses from the new fuel requirements, but they will almost certainly have to absorb some of those costs to keep customers on board,” Paris writes.

Demand for ocean trade prior to the 2008 financial crisis lead to excess tonnage that will take at least two years to absorb, with freight rates likely to be below break-even levels across some of the most popular ocean trade routes, the article notes.

China’s slowing economy and the effect of the U.S.-China trade war has caused some container carriers to adjust their yearly forecasts. A.P. Moller-Maersk AS, for instance, says potential further restrictions on global trade present uncertainties for the company, while International Maritime Organization (IMO) regulations designed to cut sulfur emissions from ships “will bring significant increases in fuel prices,” Paris reports.

According to the article, industry experts say the IMO rule that is set to go into effect at the start of 2020 will increases fuel costs by one-third.

The article cites a report from New York City-based Jefferies LLC that says, “irrational behavior with price competition remains the key risk factor and could potentially trigger the fourth wave of sector consolidation and a shakeout among some of the smaller loss-making and financially distressed Asian carriers.”

Paris writes that carriers with ultralarge container vessels designed to hold as many as 22,000 containers “are struggling to keep the ships full to make up for the big capital outlays.” This had led them to cut weekly services to get as many containers as possible on a ship, he writes, meaning fewer port calls and delivery delays that anger their customers.