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Container spot rate bump reflects limited low-sulfur BAF recouping    08/01/2020
Spot container rate increases so far in 2020 are only $80 per FEU above the 10-year seasonal average from Asia to the US West Coast and $38 per FEU higher to the US East Coast.

Now that we have entered 2020, the International Maritime Organization’s low-sulfur fuel rules for ocean vessels (IMO 2020) have taken effect. Much has been said about the possible impact over the past year, but now we will finally see if the mandate will create significant problems for the container shipping industry, or whether it is more akin to Y2K 20 years ago, which turned out to be much ado about nothing.

One aspect we can begin to ascertain already is whether the ocean carriers will be able to pass on the additional costs to their shipper customers. As of early January, the first spot rate readings in the new year have become available, and they basically show that rates should have increased quite a bit more than they did. As such, shippers need to brace themselves for more increases.

A very cursory glance would seemingly indicate a degree of success, and this is also what various press headlines have suggested. As an example, the Shanghai Containerized Freight Index’s (SCFI's) spot rate from China to the US West Coast had increased by $294 per FEU since just before the holidays. Rates to the US East Coast rates were similarly up $357 per FEU, and pricing in the Asia-Europe trade also saw substantial increases compared with pre-Christmas index readings.

Some have taken this upward rate movement as an indication of a degree of success in passing through the low-sulfur bunker adjustment factor (BAF), but unfortunately, this cannot be concluded from the data.

Taking a step back to analyze freight rate fluctuations over the past decade, we see the aforementioned increases are only slightly out of the ordinary. Historically, rate levels almost always rise between Christmas and the first week in January. Trans-Pacific rates to the US West Coast have increased in seven of the past 10 years during this period, with those increases averaging $214 FEU, while rates to the US East Coast have increased in eight of the past 10 years by an average of $319 per FEU.

In short, this means the rate increases so far in 2020 are only $80 per FEU above the 10-year seasonal average development for the US West Coast and $38 per FEU higher for the US East Coast.

In the European trades, the same pattern emerges. In fact, the increase seen in rates from Asia to the Mediterranean in early 2020 is lower than the 10-year average for the same period.

‘Normal’ seasonality

One possible explanation for the relatively modest rate hikes is that the carriers had already implemented part of the IMO 2020 low-sulfur BAF in the beginning of December, spreading it out over the course of five to six weeks, rather than pushing through one big rate increase in January.

However, using the same methodology to compare the rate level in the last week of November with the first week of January over the past 10 years also does not indicate a great degree of success for the carriers.

From Asia to the US West Coast, rates have increased from the end of November to the start of January in eight out of the past 10 years by an average of $205 per FEU. That’s just $26 per FEU lower than the $231 per FEU increase seen in early 2020. And rates to the US East Coast have fared even worse, with this year’s increase coming in at just $124 per FEU, compared with a 10-year average of $317 per FEU.

From Asia to North Europe, the November-January rate increase was only $38 per TEU higher than the 10-year average, while the Asia-Mediterranean price hike was $181 per TEU above the norm.

The bottom line is that substantial part of the rate increases since Christmas — and even since the start of December — can be explained as normal seasonality. The carriers, therefore, cannot be said to have had a great deal of success in recouping low-sulfur fuel costs just yet.

To be clear, carriers might be charging the full BAF, and shippers might be paying it on the invoice, but the numbers above show that in such cases, there also has been a corresponding erosion in the base freight rates in favor of calling it a BAF.

The problem for carriers is that the premium for low-sulfur fuel compared with non-compliant bunkers is increasing rapidly. Data from Ship & Bunker show that over the past three months, the global average pricing spread for low-sulfur and traditional marine fuel has risen sharply from $100 per ton in early October to $270 per ton in the beginning of January. The most acute increase has been seen at ports in the Asia-Pacific region, where the average premium has risen from $105 per ton to $320 per ton during the same period. 

Based on the much narrower spread seen in October, the total added cost of IMO 2020 was projected at about $5.5 billion annually. But at the current premium level, the annual cost escalates to $14.9 billion.

It is too early to determine whether this rapid escalation in the low-sulfur price premium is due to temporary transition effects or whether it will persist. It is clear, however, that the rate increases we have seen thus far are less than substantial when placed in the context of historical seasonal swings. We should, therefore, anticipate further rate increases going forward as a consequence of IMO 2020 implementation.

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