The ocean freight contracting season is upon us, and carriers and shippers will soon head to the negotiating table to lock in annual rates.
An X-factor this year could complicate matters: the International Maritime Organization's low-sulfur regulations, which required container lines to comply with a sulfur emissions limit of no more than 0.5% mass by mass starting Jan. 1. In turn, refiners had to boost production of compliant fuels and shippers had to ready their budgets for freight price hikes and surcharges.
Implementation has been relatively smooth sailing, according to IMO. "Such a major rule change is being implemented successfully without significant disruption to maritime transport and those that depend on it," IMO Secretary-General Kitack Lim said in a statement Tuesday.
The shipping market is a different story. Xeneta CEO Patrik Berglund described the market volatility as "immense."
Significant changes in fuel prices and the implementation of surcharges mean shippers may require a different approach to their annual contract negotiations.
"You should be very cautious about committing to a one-year, flat fixed deal that includes IMO 2020 fuel surcharge increases," he told Supply Chain Dive.
Shippers, carriers, forwarders and nearly all other industry stakeholders have consensus on two facts. First, global shipping is a large contributor to greenhouse gas emissions, and the industry must adapt measures to reduce environmental impact. Second, reducing emissions is not cheap.
The diversion comes in how exactly to recover costs and what the surcharging model looks like.
"Maersk Line is calling it the Environmental Fuel Fee (EFF), Hapag-Lloyd is calling it the IMO 2020 Transition Charge (ITC), HMM is calling it the Environmental Compliance Charge (ECC), CMA CGM is calling it the Low Sulfur Surcharge (LSS20), while MSC is calling it the Bunker Recovery Charge (BRC)," Hussein Ashry, economist and shipping analyst at the Suez Canal Authority, wrote in a LinkedIn post.
In addition to different names, each carrier has devised a formula to calculate surcharges based on fuel price. Most major carriers post the formulas on their websites and include a bunker adjustment or trade factor in the calculations. Naturally, different formulas produce different outcomes.
"We have witnessed a wide variation in IMO surcharges depending on different carriers, different forwarders and different trade lanes," Drewry analysts wrote in December. On the same trade route, surcharges per TEU differed by up to $90.
|Trade Route||IMO 2020 surcharge per TEU|
|North Europe to Brazil||$60-85|
|Far East to Europe||$70-150|
|Brazil to North Europe||$80-$145|
|Far East to US||$123-194|
|North Europe to Australia||$193-281|
The Global Shippers Forum released a list of 10 tips for shipper negotiations. The forum encouraged shippers to ask questions about fuel costs and surcharges and get carriers to show the calculations behind fees.
"You just want to make sure that if you do pay extra, you know what you're paying for and don't get blindsided by misunderstandings or misinterpretations of what is quite a complex regulation," James Hookham, director and secretary-general of the Global Shippers Forum, told Supply Chain Dive.
Hookham suggested one way to avoid misunderstandings on pricing between shippers and carriers is with all-inclusive pricing contracts, though he acknowledged that practice is a "novelty in global container shipping."
"What you are told is the going price in Singapore and New Orleans and Rotterdam, it won't be the same next week or next month."
Director & Secretary General, Global Shippers Forum
Hariesh Manaadiar, author of Shipping and Freight Resource, said the model of carrier surcharging is here to stay. "The line has to cover all their other costs through various surcharges at various stages as the situation demands," he told Supply Chain Dive in an email.
He said shippers, no matter how large or small volume, should "look for clarity on every dollar that they pay."
Hookham noted carrier surcharges are based on precise science, so container lines should be able to show shippers the exact calculations behind a surcharge if they ask.
Watch the market and wait to settle — if you can
Globally, spot rates rose significantly in the lead up to IMO 2020, although seasonality accounts for some of the increase.
"Carriers are using IMO surcharges to lift spot rates, especially as annual contract negotiations are approaching," Drewry wrote in December, before the surcharges took effect. Drewry's World Container Index showed a 17% week-over-week rise in spot rates from Dec. 5, 2019 to Dec. 12 on Shanghai-Rotterdam trades, and a 14% rise from Nov. 28 to Dec. 5 on Shanghai-Los Angeles lanes.
BIMCO data shows a 30% increase in low-sulfur fuel oil prices at the port of Singapore from the beginning of December to the beginning of January. Drewry, which calculates an average bunker price based on a weighted average at the ports of Singapore, Rotterdam and Houston, saw a 35% quarterly increase in price in Q4 2019.
CMA CGM said starting Feb. 1, the retained value per ton (calculated using the difference in low-sulfur fuel price between the current month and two months prior) will be $275, up from $200 as of Dec. 1.
In a notice Wednesday, Maersk said its fuel and bunker fees undergo monthly review to account for changes (up or down) in low-sulfur fuel prices. "The tariff increases will be seen across all trades with an increase range between 50 to 200 USD per [FEU], reflecting the increased fuel costs associated seen during recent weeks," the container line said.
Rahul Kapoor, head of research at IHS Markit Maritime and Trade, told Bloomberg he expects other carriers to follow Maersk's path and up their own surcharges.
Now toward the end of January, the price of low-sulfur fuel is already dropping, according to BIMCO data. Experts said they expect prices to stabilize and even decrease over the year, as new refiners enter the market and supply catches up to demand. If the price continues to fall, carrier surcharges should adjust accordingly per their formulas and therefore decrease.
"There is no fixed price for low-sulfur fuel," Hookham said. "What you are told is the going price in Singapore and New Orleans and Rotterdam, it won't be the same next week or next month."
Experts recommended shippers avoid locking in a fixed rate given the market volatility. For shippers who for any reason need to settle in rates sooner rather than later, Berglund advised baking flexibility into the contract to be able to renegotiate based on the state of the fuel and freight market after a few quarters.
"The ones who hold out the longest will be the most informed. The ones who settle the earliest have the most amount of risk," Berglund said. "Eventually this IMO 2020 thing will just settle into normal fuel."