This commentary appeared in the print edition of the Jan. 6, 2020, Journal of Commerce Annual Review and Outlook.
The biggest macro change in generations for the shipping industry is the new International Maritime Organization (IMO) fuel cleanliness standards.
By adding some 25 percent to total vessel costs, there will be situations where this change makes the movement of cargo uneconomical. As such, it will be negative for overall demand.
With the industry currently using 305 million tons of fuel per year, the impact will be something on the order of $70 billion per year. That is quite a burden on an industry that is not performing satisfactorily on any metric, most notably return on investment.
The impact on the tanker and bulker companies will be indirect, as charterers typically pay for fuel. However, the higher cost will put downward pressure on the time charter rates they are willing to pay.
The impact on the container companies, however, will be direct and material.
Container carriers will be hit with $19 billion of additional annual fuel costs that must be recovered, or poor financial results will get worse. For the first half of 2019, the industry lost $0.4 billion. That brings the cumulative loss from 2016 on to $9.4 billion.
Beyond chronic overcapacity, part of that resulted from an archaic fuel surcharge mechanism that is totally broken. Subjectivity, timing inconsistency, equivalency among unequivocals, arbitrariness, randomness across carriers, and opaqueness lead to little credibility with shippers. Ironically, the present mechanism has historically hurt carriers more than shippers.
The first step in charting a path to consistent industry profitability is to replace the current mechanism with one that works. Profitability comes after real capital costs; forget earnings before interest, tax, depreciation and amortization (EBITDA), a near-­meaningless metric when you have rusting assets that must be replaced.
If this challenge becomes a wakeup call to perform more businesslike, then the environment won’t be the only beneficiary from this overdue switch to cleaner fuel.