Carriers use floating contracts to account for fuel prices

Date: Thursday, May 2, 2019
Source: American Shipper

The conversion to become IMO 2020 compliant is expected to happen in the fourth quarter.

Stuart Sandlin, senior vice president of Hapag-Lloyd, said fuel variability has long been covered in contracts in every other mode of transportation.

“I think this is going to be a really interesting year as this technology will affect us most as far as our expenses,” Bodnar said. “I’m not going to say the cost of fuel isn’t an issue, but if we have properly accounted for it within contracting it’s really about how you administer it for how it affects your bottom line.”

The IMO 2020 mandate requires ships use fuel with a sulfur content of 0.5 percent or less, down from the fuel with a 3.5 percent sulfur content often used today, unless it is equipped with scrubbers to remove sulfur from the engine exhaust. The move to cleaner fuel is estimated to increase prices by $10 billion to $15 billion for the container shipping industry.

Hyundai Merchant Marine in March signed a memorandum of understanding to establish a fund for scrubber installation and plans to complete the installation on 19 containerships currently in use by the first half of 2020. NYK also entered into a 9 billion yen syndicated loan agreement with the proceeds devoted to buying and installing emissions scrubbers.

Half of the 10 15,000-TEU containerships CMA CGM ordered in March will be fitted with scrubbers, while the remaining five will be fueled by LNG.

Hapag-Lloyd is installing scrubbers on 10 vessels and is converting one of the 17 ships it acquired from its 2017 purchase of United Arab Shipping Co. to run on LNG.

Bodnar said ONE’s “intention is to burn the fuel” and it has not decided or committed to any scrubber technology. 

The key to factoring in fuel prices into contracts is transparency, said John Janson, logistics director of SanMar.

“It’s a pass-through. I think that we have to define the tool we’re going to use to measure it and then you get into some of the complexity of how do I pay for a scrubber?” he said. “They’re still burning the cheaper old fuel. How am I going to pay for the scrubber after that’s advertised over several trips? What happens to that? Nobody’s had that answer yet that we’ve heard, at least that we want to completely believe.”

The fuel conversion is expected to begin taking place in the fourth quarter, which Janson said would be a disruptor.

“They’re going to be pulling vessels out of the string to put in all of these new scrubbers to scrub the fuel out,” he said.

The panel also discussed the outlook on mergers and alliance changes, how carriers differentiate themselves in a consolidated environment and how the increase of vessel sizes calling the East Coast via the Panama Canal is factored into 2019-20 models.

Large-scale mergers and acquisitions are done for right now due to regulatory authorities, Sandlin said, but he didn’t rule out alliance changes. “I think alliance makeup changes could happen sooner or you could of course see the continued acquisition of some of the very, very, very small niche players in certain markets where there is some competitive advantage to have ships.”

Janson said there is a place for both mega alliances and niche players, but an issue BCOs face is not having all their contracts end up with one alliance.

“From a differentiation standpoint it comes down to do you say what you’re going to do and keep us well informed,” Janson said. “The customer service aspect of it is a huge thing.”

Bodnar, Sandlin and Brenters all said technology is a way for carriers to differentiate themselves from others. 

Sandlin also said the expanded Panama Canal has improved the size capacity of ships calling the East Coast, which has created a more competitive environment between the coasts. SanMar has eight distribution centers across the country, including centers in Seattle that handles Asian imports and Jacksonville, Fla., that handles imports from Africa and South America. The company could re-evaluate how much cargo flows through Seattle and Jacksonville in the near future, he said.

“For the first time we’re starting to look at total cost. If the West Coast is going to have congestion problems like we’ve had the last couple of years, does it make sense to do all Asia into Jax, Savannah on the East Coast?” Janson asked. “Probably not this year, but in the next year we’re going to look seriously at saying we should rebalance everything and look at it again.”

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