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Maersk: Contract rates hike driven by bunker fuel price jump    10/02/2018
Maersk Line is increasing contract rates across all geographies to levels that are in excess of the bunker fuel price increases, according to Maersk Line chief commercial officer Vincent Clerc.

Sharply rising bunker fuel prices are placing pressure on freight rates. Photo credit: Maersk Line.

Bunker fuel prices rose 25 percent in 2017 and cost Maersk $903 million, a 35 percent increase on the previous year that pushed unit costs up almost 4 percent, the carrier said in its 2017 results announcement. Maersk Line recorded a $541 million profit for the year.

“On what we have signed up so far, across all geographies, we are signing up contracts with increases in rates in excess of the increases we have faced in bunkers,” Clerc said during the Maersk Group earnings call. “We are halfway into the renewal of our contracts so it is too early to really have a post mortem on how we are doing, but obviously the bunker recovery is very important.”

But Clerc emphasised that contracts made up only half of the Maersk Line business, and while higher rates would enable the carrier to recoup costs in that area, the other half of the business was independent from the contracted rates.

“It is on the short term where negotiations are only on price and although bunkers are a factor, the overall asset utilization plays a bigger role. So it is a negotiation on a week-by-week, or month-by-month basis,” he said.

Asia-Europe contracts are generally set in the early part of the year while the trans-Pacific contract season runs from May 1, 2018, to April 30, 2019. Clerc said that overall, Maersk was expecting to renegotiate contracts with an increase.

Profitability levels obviously differ between the various trade lanes, but Maersk Line’s rates for 2017 were well below the average per FEU levels achieved in 2013 and 2014 when the rate surged past $2,600 per FEU. The rates peaked in the second quarter of 2017 before beginning a fall that lasted for much of the second half and taking rates to their lowest level of the year in the fourth quarter.

While rates began to slide after the second quarter, Maersk Line’s volume continued to grow, even through the traditionally slow last quarter, and headhaul volume on the major routes rose by 5.5 percent from October through December, driven mainly by east-west trades and intra-Asia. Volume on east-west services grew by 2.4 percent to 3.77 million FEU, on north-south by 2.2 percent (5.21 million TEU) and by 7.3 percent on the carrier’s intra-regional operations (1.73 million TEU).

Data from PIERS, a product of JOC.com, shows Maersk Line in 2017 recorded US import growth of 5.7 percent year over year to 2.1 million TEU, which lagged the 6 percent increase in US imports for the year totaling 22.9 million TEU. Maersk’s export decline of 4.4 percent to 1.2 million TEU was also in contrast to the 1.6 increase increase in US exports to 12.5 million TEU. Maersk Line’s total US volume increase of 1.8 percent to 3.3 million TEU was below the 4.6 percent increase in overall US container trade to 35.5 million TEU.

The north-south trade demand was mainly from parts of South America and Africa, reflecting an economic stabilization in countries such as Brazil, Argentina, and Nigeria, but also came in the wake of a strong correction in inventory dynamics following sharp reductions in the preceding years, Maersk noted. 

Chinese import growth was strong in the first half of 2017, but slowed down in the second half of the year following similar developments in Chinese economic activity. An added factor that affected imports were tightened restrictions on pollution in northern China, and initiatives to restrict imports of waste and scrap materials.

Container growth through the top Chinese ports in 2017 more than doubled to 7.1 percent, pushing volume to more than 200.3 million TEU. While all of China’s Top 20 ports recorded growth last year, Shanghai’s 8.4 percent increase is noteworthy not for its degree, but its result, which carried the port past 40 million TEU for the first time. Other star performers were Ningbo-Zhoushan, up 14.1 percent to 24.6 million TEU, and Xiamen, which grew 8 percent to 10.4 million TEU.

Rising fuel prices push up the unit cost of transporting a container and can quickly erase scale benefits derived from deploying larger vessels. This can be seen in Maersk Line’s results where even though the average rate per FEU in 2017 rose by 11.7 percent to $2,005 per FEU across its global operations, unit costs rose 5 percent to $2,079. Weekly rate movements across the major trades are tracked at JOC.com's Market Data Hub.

The average price of bunker fuel increased 130 percent from 2015 to 2017 to about $390 a ton in Rotterdam, New York, and Shanghai, after hitting a three-year low of $170.05 in January 2016, according to IHS Markit, parent company of JOC.com. The price of a barrel of Brent crude in the United States rose 12.8 percent in 2017.

Although IHS Markit expects prices per ton to hover between $300 and $350 through 2018, bunker analyst Breakthrough Fuel predicts “gradual upward pressure on prices through 2018.”

Hapag-Lloyd told JOC.com that the steadily increasing bunker market price required bunker cost recovery and it had switched the frequency of its fuel price calculations from quarterly to monthly. That enables the carrier to adjust quickly to fuel price rises rather than have to wait until the end of the quarter.

“Bunker prices have more than doubled since January 2016 for both MFO [marine fuel oil] and MGO [marine gas oil],” the carrier said. “The monthly BUC [bunker charge] calculations are key drivers in enabling Hapag-Lloyd to continuously supply customers with an excellent service.”

 




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