Carriers enjoyed a recovery in profitability in 2019, but they could see those gains evaporate if they fail to control costs, above all, their fuel costs, according to the 2020 outlook for global container shipping industry report by AlixPartners, the global advisory firm. The container shipping industry has entered a new era, marked by stringent limits on sulfur emissions that will likely trigger an increase of as much as US$10 billion in the sector’s annual cost base.
The increase comes as many carriers are laboring under heavy debt burdens and low profitability. The very survival of some carriers will depend on their ability to pass their higher fuel costs along to their customers.
Complicating matters is widespread dissatisfaction with the variety of formulas that carriers use to calculate the energy-cost burden that shippers should bear, known as the bunker adjustment factor (BAF). Every carrier has its own variation on the basic formula. The lack of transparency and standardization of those variables is a constant irritant to shippers, freight forwarders, and nonvessel-operating common carriers (NVOCCs).
This gives rise to the suspicion that some carriers are using the BAF as a revenue-raising tool as well as a cost-recovery and risk-sharing mechanism. The uncertainty can lead to fraught negotiations and frayed relationships that take a toll on both sides and add to the headwinds the container shipping industry faces.
If there’s an upside to the fuel-market turmoil for carriers, it’s the opportunity to reprice fuel while uncertainty still prevails. The terms they set now will be difficult to unwind even if surcharge formulas are eventually standardized.
Amid signs that container shipping revenues will remain flat or increase only slightly in 2020 as demand growth sags below the peaks of earlier years, the industry’s financial condition remains perilous, with many carriers laboring under heavy debt burdens. Chronic overcapacity has afforded carriers little leverage in price negotiations for much of the past decade. And now comes the IMO 2020 regulatory mandate that will drive a sudden and massive increase to the industry’s cost base.