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Ocean freight facing major ‘disruption’ this year

Lines face multiple changes and headwinds, ONE’s Jeremy Nixon tells Multimodal 2019, while shippers will have to pay the ‘significant’ extra cost of new low-sulphur fuels.

The liner shipping industry is facing major disruption this year as the US-China trade war escalates, global economic growth forecasts are downgraded, and the challenge of introducing – and paying for – new low-sulphur fuels to meet the requirements of IMO 2020 regulations looms, according to Jeremy Nixon, chief executive officer of Ocean Network Express.

Addressing delegates at Multimodal 2019 yesterday at the UK’s NEC in Birmingham, he said initial expectations that supply and demand would equalise at around 4% growth this year, helping balance trade, were quickly dashed, not least by the frontloading on the Transpacific trade at the end of 2018 ahead of scheduled – but eventually delayed until May – tariff escalations on Chinese imports to the USA on 1 January.

“We saw very, very strong volume flows during October, November, December [on the transpacific eastbound trade],” he said. “Many customers wanted to bring their inventory early to get around 25% the tax increase. In fact, a lot of customers did that.

“And that’s meant that in January, February, March we’ve seen a weaker transpacific eastbound trade.”

The trade war has had a knock-on impact across Asia as manufacturers cut production and sourced products outside China, a trend likely to continue if the conflict escalates, with some forecasters predicting a new tranche of threatened US tariffs on China will likely be implemented in the third quarter.

“Not only did [the tariff war] impact on the transpacific trade, but it also had a big impact on the intra-Asian trade,” said Nixon. “A lot of the intra-Asia trade lives off the back of the deep-sea trades and of course, with production slowing down, we saw a slowdown also in the intra-Asia trades. So, Japan into China during January and February was very quiet. As was southeast Asia into China.”

The trade war was, he said, now “having a direct impact on the supply chains of many of our customers, and ultimately on the container shipping operators”.

The upshot, he said, was that while European demand had performed satisfactorily over the first five months of the year, and European exports to the US, particularly related to automotive industries, had been strong at around 8% growth, Chinese imports into the US had contracted by 6.5%.

“That’s a very significant contraction, because actually China imports make up 70% of the transpacific trade,” he said. “As a result of that, southeast Asia exports have boomed. And we’ve seen out of Vietnam, in the first five months of this year, a 30% increase in exports to the USA compared with the same period last year.

“So, a lot of disruptions are starting to happen, impacting certain economies, impacting and hurting certain trade flows. And that has moved supply and demand in specific markets.”

Fuel prices are also proving disruptive to liner shipping at present, not least due to the attacks on tankers in the Middle East and shipping lanes are threatened – although the effects of that on fuel prices were limited because of concerns that the US-China trade war will limit economic growth.

Nixon said this was adding to bunker price volatility ahead of the implementation of IMO 2020 low sulphur fuel regulations by January 1 next year.

He predicted that by then, only around 6-7% of container ships would be fitted with scrubbers and would not need to use the new, low-sulphur fuels which lines are expected to start introducing as soon as late in the third quarter.

With the difference in price between bunkers currently in use and the new fuels possibly increasing by as much as $500 per tonne, he said lines would need to pass all the costs on to shippers.

“Today we’re paying in Singapore about just under $400 a tonne for high-sulphur fuel,” he said. “Low sulphur fuel could go up to $900 a tonne. That would be extremely serious situation. It is probably going to be less than this, but I think the difference in price is going to be at least probably somewhere around $200, which is very significant.

“And that’s why shipping operators have to pass on the fuel cost increase 100% through the supply chain to their customers.”

Landside disruption

He also said liner operations were being disrupted on the landside at ports around the world as ocean terminal utilisation levels had surged over the last decade – including higher peaks in demand and significant periods of underutilisation – and the number of people entering the trucking sector had tumbled.

“When the ships come to a land interface, the terminals generally are not working 24/7,” he said. “Some do, but certainly when we start getting the containers off the ships and into the yard and start working the delivery through the distribution centres, we find that water transportation is not working 24/7.

“This issue is continuing to become significant and we’re having to work very strongly to protect the supply chain and particularly the carrier haulage product going forward.”

Nixon also said global warming was a growing threat to global container operations due to the significant increase in the severity of weather, particularly in the rising number of hurricanes and typhoons which closed ports and halted supply chains.

“In 2017 we had 12 typhoons coming through central Asia and by 2018 that had already increased to 17,” he said. “So, the number of typhoons has really significantly increased and every time one of these comes through, it generally results in port closures and it results in vessels waiting.

“Just in the port of Shanghai, in 2018, we had nearly two months of disruption, where the vessels simply couldn’t dock or were waiting for other vessels to clear.

“Also, the typhoons are moving farther north, hitting now Shanghai, Korea and Japan.

“When this happens, the ability for the terminal operators and ports to recover within 24 hours is simply not possible. And this is also leading to longer periods of down time and more operational impacts.”

Source: Lloyds Loading List



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