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Volatility in pacific ocean shipping freight rates likely to continue in 2019

THE cheapest way to move goods into the US from overseas will get more expensive as fuel prices rise and ocean carriers aim to boost their earnings

Volatility in pacific ocean shipping freight rates likely to continue in 2019

THE cheapest way to move goods into the US from overseas will get more expensive as fuel prices rise and ocean carriers aim to boost their earnings

06 March 2019 - 19:00

THE cheapest way to move goods into the US from overseas will get more expensive as fuel prices rise and ocean carriers aim to boost their earnings.

The Ports of Los Angeles and Long Beach, despite all their congestion issues, are still the fastest and cheapest ways to bring freight from Asia into the US. But the trans-Pacific market has been anything but pacific, said Mark Szakonyi, executive editor of JOC.com, creating an 'erratic trans-Pacific shipping market' that was marked by spot shipping rates rising as high as US$2,300 per FEU, reduced capacity from the ocean carriers, severe port congestion and lower levels of service.



'The outlook (for ocean freight) is framed by a new level of geopolitical and economic uncertainty,' Mr Szakonyi told an audience at Journal of Commerce's TPM 2019 conference in Long Beach.



'Beyond the tariff tensions, there's also a slowing global economy and we have less cushion when there's shocks to the system.'



Trans-Pacific ocean shipping was one of bright spots for the container ship industry last year. While overall container ship demand rose just under 4 per cent last year, trans-Pacific shipping, specifically Asia-to-US grew 4.7 per cent said Uffe Ostergaard, US president for Hapag-Lloyd, adding about one million TEU to demand, reports New York's FreightWaves.



The second half of 2018 had the biggest growth thanks to the tariff-related concerns of US importers. Mr Ostergaard says the fourth quarter was marked by an extra 150,000 TEU of demand just from tariff front-loading. Spot ocean freight rates nearly doubled between June and November last year due to the increased demand.



'We certainly saw very robust trade growth in 2018,' Mr Ostergaard said. 'That's real robust growth.'



He says the fundamentals are still good for continued high demand into the US as unemployment remains low and the strong US dollar makes imported goods cheaper.



Mr Ostergaard said those factors support 'a decent level of demand' in 2019 at just under 4 per cent.



The demand is coming up against additional vessel capacity of 2.6 per cent expected next year, meaning a more balanced market, Mr Ostergaard said. Indeed, the IMO 2020 fuel regulations could further tip the balance in ocean carriers favour as more ships are taken out of service, Mr Ostergaard said.



Citing research from ship industry researchers, up to one per cent of the world container ship fleet could be out of service during 2019 due to being fitted with sulfur scrubber or having their fuel tanks cleaned ahead of filling up with low-sulfur fuel.



'Those are the things that we see could have an impact on the supply and demand balance,' Mr Ostergaard said.



The switch to a more expensive, low-sulfur fuel is bringing new challenges to ocean shipping in terms of how to price annual customer contracts, said Philip Damas, director of maritime consultancy Drewry. He says shippers with a couple of thousand containers per year can expect to pay $1 million or so in higher costs due to fuel surcharges from ocean carriers.



The risk of higher fuel prices, along with the need to increase overall margins, means ocean carriers are seeking rates up to 10 per cent or higher for 2019.



The low-sulfur fuel mandate 'will be the biggest operational risk for carriers in 2020', Mr Damas said. 'The first round of bids from providers show double-digit price increases from previous levels.'



Not that there are no options for shippers. Ocean carriers are starting to look at using floating rates as opposed to fixed rates for shipping. But the changes to variable costs for the ocean carriers means that many are 'no longer willing to sign contracts with fixed all-in rates', Mr Damas said.


WORLD SHIPPING

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