Market Rates and Trend Forecast

May 6th, 2019

Ocean Freight

Ocean freight rates for the first half of May increased by approximately US$50/FEU to the USWC and US$125/FEU to the USEC. This rate increase can be attributed to blank sailings and the possibility that the world will find out the results of the protracted U.S./China trade dispute by the end of May.

Blank Sailings

Ocean carriers across the three alliances has announced a number of blank sailings to the U.S. west coast throughout the month of May up until the first week of June 2019. These blank sailings are set to reduce capacity by approximately 66,600 TEUs. The rationale behind these blank sailings are two-fold: To prop up spot rate prices and to retrofit a number of vessels with scrubbers in anticipation of the International Maritime Organization’s (IMO) 2020 low-sulfur fuel mandate.

Scrubber Retrofitting on Vessels

An estimated 550 containerships with a total capacity of 6 million TEUs are scheduled to be retrofitted with scrubbers in order to meet the IMO’s 2020 low-sulfur mandate. Approximately 30 vessels will be taken out of service each month in order to have the equipment installed which takes 30-40 days to complete. The number of vessels affected is about 300,000 TEUs or 1.3 percent of overall supply.

Container liner MSC will have about 180 ships fitted with scrubbers whereas Evergreen Marine will have 80 and Maersk Line with 50 ships. Ocean Network Express CEO Jeremy Nixon has also mentioned that they will only have 10 vessels equipped by early 2020. The estimated cost of retrofitting the equipment is US$4 million for each vessel and shippers are expected to shoulder the lion’s share of the burden.

Although a number of vessels are scheduled for retrofitting, the remaining majority of vessels are expected to utilize low-sulfur fuel oil in order to meet the IMO mandate which is estimated to cost carriers an additional US$10 billion to $15 billion in annual expenditures. An issue that is starting to surface revolves around ocean carrier’s impending fuel recovery surcharge formulas that assumes 100 percent low-sulfur fuel usage when a percentage of the fleet will be equipped with scrubbers.

Container Line Schedule Reliability

Ocean carrier schedule reliability improved in March over February from Asia to the U.S. to 51.6 percent to the U.S. west coast (13 percent increase) and 36.5% to the U.S. east coast (5 percentage increase). This is largely attributable to the volume decline after the Lunar New Year.

Although reliability from Asia to the U.S. has posted decent improvements over the previous month, performance continues to trail global schedule reliability of 74% in March. This difference in schedule reliability is largely in response to the worries caused by the U.S./China trade dispute. In the upcoming months, Laconic sees schedule reliability to deteriorate once again due to capacity being removed for retrofitting of scrubbers on vessels.

U.S./China Trade Dispute – Update

On Sunday May 5th, President Trump announced that he will increase tariffs on Friday May 10th on US$200 billion of imports from China to 25 percent (current: 10 percent). At the same time, he raised the possibility of additional tariffs of 25 percent on another US$325 billion of imports. The announcement came in the midst of what appeared to be the final round of negotiations with Chinese Vice-Premier Liu He originally scheduled to arrive in Washington on May 8th but may now be postponed. Both U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin described negotiations to be productive during their visit to Beijing last week.

The conflict thus far has weighed on confidence, dented shipments and has businesses around the world worrying. Optimistic negotiations over the past few months generated hopes that the world economy might be able to avert further trade-war risks, but the latest announcement might reverse that momentum.

Oil Prices

The White House’s announcement last week that it would soon end Iranian waivers helped push crude to a six-month high last week. U.S. sanctions on Iran and Venezuela, OPEC+’s output curbs, disruptions from Nigeria and Libya and contamination of Russian Urals oil have been the main contributors to oil’s rally. However, continuous increases in American production and the possibility of OPEC+ ending its supply curbs could drag prices down. Oil is one of the largest expenditures for ocean carriers and often leads to higher fuel recovery related surcharges during times when oil prices are continuously high.