Will IMO 2020 change US ports of call?

Date: Friday, July 19, 2019
Source: American Shipper

A fuel spike could push Asian containers to West Coast ports, but time and risk elements also must be considered.

The Panama Canal is designed as a shortcut. It’s the most impressive shortcut ever built in the history of mankind. For shippers sending U.S. liquefied natural gas and liquefied petroleum gas to Asia, it drastically reduces voyage time.

But when it comes to Asian containers being shipped to the U.S., the Panama Canal is not a shortcut. Between Shanghai and the Port of Prince Rupert in Canada (which connects via rail to Chicago), it’s 4,678 nautical miles. Between Shanghai and Los Angeles/Long Beach, it is 5,708 nautical miles. To Charleston, S.C., via the Panama Canal, it’s 10,170 nautical miles. To New York/New Jersey, it is 10,582 nautical miles.

In other words, it takes roughly twice as much travel at sea to get from Asia to the U.S. East Coast via the Panama Canal than to the West Coast. Starting on Jan. 1, this disparity is about to matter much more than it ever has before. On that date, the IMO 2020 rule goes into effect, mandating that sulfur content of marine fuel and emissions cannot exceed 0.5%.

Unless a ship has an exhaust scrubber installed, this will require operators to switch to ultra-low-sulfur fuel, including marine gas oil (MGO), which is expected to be much more expensive than the high-sulfur heavy fuel oil (HFO) used today.

How much more expensive MGO and other ultra-low-sulfur fuels will be compared to HFO remains a topic of considerable debate, but there are some estimates that compliance could cost an extra $300 per ton of fuel. Container lines are seeking to recoup all of the extra cost from shippers through bunker-adjustment factor (BAF) charges.

The BAF will account for voyage distance. Every extra day at sea means more consumption of compliant fuel. Thus, the cost to ship containers from Asia to the U.S. East Coast rather than the West Coast theoretically should increase in relation to the extent that the cost of IMO 2020-compliant fuel exceeds that of HFO.

Moving the dividing line. For a shipper bringing Asian cargo to the near vicinity of East Coast ports, this won’t matter. A Manhattan cargo shipper will still book slots on vessels transiting the canal and coming into Newark. But the farther west you go into the hinterland, the more it will matter.

Prior to IMO 2020, there has been a line of demarcation in logistics decision-making running north to south, roughly around the Ohio River Valley down to Nashville, Tenn. To the east of that line, it makes sense to bring Asian containers by sea through the canal to an East Coast port, then westward via truck. To the west of that line, it makes more sense to bring Asian boxes into Los Angeles/Long Beach, Prince Rupert or Seattle/Tacoma and then use intermodal rail to bring them east (and trucks for the final leg). 

Where this decision-making line ultimately is drawn has major financial implications. The farther west it moves the better for the Panama Canal, East Coast ports and trucking. The farther east the better for rail carriers and West Coast ports.

IMO 2020 might tug this line eastward — to the benefit of West Coast terminals. But according to industry experts interviewed by FreightWaves, the equation is not so simple. Even if there is a huge jump in the price of marine fuel, there may not be a significant shift in volume back to West Coast ports and away from the Panama Canal.

“If you look at this in isolation and marine transportation fuel goes up and U.S. domestic transportation fuel doesn’t, that would suggest more cargoes would go to the West Coast,” said Jim Blaeser, a director in the transportation and infrastructure practice of global consultancy AlixPartners.

According to Paul Bingham, director of transportation consulting at IHS Markit, “The BAF adjustment upwards in shipping prices could have an impact on East Coast versus West Coast port competition because the extra sailing distances consumes a significant amount of additional fuel.”

Risk mitigation. But Blaeser emphasized that the decision can’t be looked at in isolation. “Many shippers use the East Coast ports for risk mitigation so that they don’t put all their eggs in the same basket,” he told FreightWaves.“Most of the major brands and retailers try to leverage a ‘four-corners’ strategy, where they have freight through the Pacific Northwest, Southern California, Southeast and Northeast. They want to make sure that if there’s a natural disaster, a port strike or extreme congestion, they’re not depending on one gateway.”

Blaeser noted that any shipper decision on which coast to call on is based on a combination of cost, time and risk elements — not cost alone. “If you’re optimizing the cost element, you’re putting more eggs in the least-cost basket,” he said, pointing out that this increases the risk element.

Panama Canal response. “Also, if there was a dramatic flow of cargo going back to the West, those with a vested interest in maintaining East Coast flows — the carriers, the Panama Canal and the ports — would respond,” said Blaeser. 

“There are smart people at the Panama Canal. Billions of dollars have been invested in one of the biggest assets on Earth. They will not sit idly by and watch their volumes decrease,” Blaeser continued.

FreightWaves specifically asked the Panama Canal Authority (ACP) whether it was concerned that IMO 2020-induced BAF charges would make the Panama Canal route less attractive versus the West Coast route, and if so, whether its latest round of incentives for container lines is related to that concern.

ACP officials did not respond directly to those questions, but they did provide comment. ACP environmental specialist Alexis Rodriguez said it is “a vocal supporter” of IMO 2020 and acknowledged that “the canal anticipates that the implementation of IMO 2020 may create business and operational disruptions across industries.” 

ACP liner services leader Argelis Moreno de Ducreux said that both loaded container volumes and average vessel size to the U.S. East Coast have continued to grow and asserted that the Panama Canal “expects to maintain its market share.”

Congestion and domestic fuel costs. If an IMO 2020 fuel spike does push a material volume of containers to West Coast ports, there would be other offsetting factors as well. According to Blaeser, “If the IMO 2020 impact was so strong that it started to sway the balance of freight back to the West Coast, those ports would see congestion and other efficiency issues. At the end of the day, there’s only so much cargo the West Coast can handle.

There is also the very real possibility that IMO 2020 will not affect the price of marine fuel in isolation, but also will hike the price of U.S. diesel. “If all the fuel goes up proportionally [ocean, rail, trucking], you’ve just maintained equilibrium,” said Blaeser.

However, if fuel costs for all transport modes surge in unison, there would be an implied benefit for rail. “If there are higher fuel costs across the board, there’s more incentive for shippers to use slower modes of transportation, so you would see them trading out of trucks into intermodal. There are a lot of shippers that bring containers into Los Angeles/Long Beach and use trucks well into the Midwest. If fuel prices rose overall, more of that would go to rail,” he said. 

Shipping decision timing. Yet another factor in the post-IMO 2020 East Coast-West Coast equation involves the timing of the fuel cost impact and how long U.S. shippers believe it would persist.

 

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