As we enter 2019, let’s try to predict potential market dynamics (and make a few bets…) for ocean freight shipping. Discover the analysis of Jérome de Ricqlès.
Capacity available: current fleet capacity is sufficient, yet additional Ultra Large Container Ships are being added. This trend will be most visible on the Eastern/Western/Eastern routes (operated by MSC, Hyundai Merchant Marin, etc.).
Volume of demand: projections from various sources are showing a potential growth of about 3% to 4.5% in 2019, which won’t be enough to fill up all the extra incoming and already available shipping capacity (not even the hidden one).
Newcomers: Amazon is now an active non-vessel operating common carrier (NVOCC), and it has voiced its interest in fully controlling the Supply Chain. So far, this isn’t anything more than wishful thinking. However, the Bezos’ firm is such a vertical player that it makes the perspective of a new model highly probable.
Terminals and their related reefer capacities: with the reefer segment’s expected growth of 5% to 8% in 2019, we foresee increased energy costs (from plugging), on shore plugging management issues, and more restrictive free time policies on terminals imposed to the Carriers. This will also create a potential for steep operating costs increases in 2019. Even if it seems at first glance that such costs will be partly born by the carriers, they could still eventually be reinvoiced, with margin, to the final customer.
International Politics: we are betting on pressure relief and foresee signs of normalization in the Trump / Xi Jinping relationship, as well as on the topic of the Iranian files, even though negotiations are still underway. More generally speaking, we expect the overall geopolitical climate to cool down, but we’re also being watchful of the interactions between economic performances and politics. Earlier this month, the Federation of German Industries issued 54 measures suggesting how a united EU could compete more efficiently with China. The latest economic growth forecast of 2019 issued by the IMF on January 21st is 3.5 percent, 0.2 lower than its October 2018 forecast. The economic slowdown can have a negative impact on the political stability, which in return can disturb economic growth.
Brexit: at this point, it is still unclear how this issue will unfold, and we don’t know how it will impact Europe and the current vessel rotations on the Asian routes. With legal changes underway, carriers will have to adapt, and change their practice from their usual EU Customs Manifest entrance. However, the implementation process remains to be determined. In the case of a “no deal”, a potentially revamped TACA Agreement between the US and UK can also impact EU policies.
IM0 2020 sulphur regulations and greener transportation trends are a positive evolution for the industry’s environmental footprint. These new rules will create extra costs, which will grow as 2019 unfolds. The question is, will the cargo absorb all the 15% cost increase? Some carriers have already given insights on their choice. For example, AP Möller Maersk announced in November 2018, that IMO 2020 regulations will represent a $2 billion/year cost increase, which will be eventually invoiced to clients. In this respect, we would like to highlight the fact that the current actions are focused on de-sulfurizing (reducing the amount of sulphur in fuel from 3.5% to 0.5% by 2020), rather than on de-carbonizing the market.
First tenders of 2019: as usual, the first tenders of the year are potential market trend setters. In analyzing these results, we can see a relative price stability year to year. We also notice increased shipper awareness on the additional costs stemming from the use of cleaner fuels, like MGO, later in the season. However, shippers will pay the extra costs only when carriers show them the bills, not by anticipation.
Disappointing transit times due to vessels waiting to be fully loaded before leaving the port. This trend is increasing the gap between industry lead times and the perception of maritime transit time… This window of opportunity will be watched closely by air freight and even intercontinental train services, with some additional supply chains disruptions to foresee.
Vertical Integration: in the wake of the CMA-CGM deal with CEVA... 2019 might bring new marketing approaches. Carriers concentration is slowing down slightly after experiencing 3 strong years of M&A. Some trends signal that big NVOCC are also set to vertically integrate. The recent DSV/Panalpina case may not be an isolated event and may foretell the 2019 trends. The main target is definitely to enter into long-term contracts to increase profitability. It will also strengthen relationships among key partners looking to integrate currently externalized costs (APIs…). This trend will contribute to reassuring banks who recently showed their reluctance to back Liner only operators.
2019 should remain a shipper’s driven market
All in all, we can say that, on a global scale, 2019 should remain a shipper’s driven market, in the continuity of the past decades. The capacity ratio versus the volume of Forty-Foot Equivalent Unit (FEU) available is indeed expected to remain globally in favor of the demand’s side.
Costs related to low Sulphur burning bunker will be addressed, increasing prices by 50 to 150 USD per box, which would be, at least, partially integrated in the Ocean Freight construction cost structure. Therefore, Marine Gasoil (MGO) supply should theoretically not be an issue, if oil players keep up with market trends. However, recent announcements from OPEC about reducing their production by 1.2m barrels a day could mean increased pressure on prices in the coming months, not to mention the troubles in Venezuela. We are talking about a related 15% increase in demand for MGO (basically a similar product to domestic heating Gas Oil).
International political factors are still a big question mark. The increase in American import taxes had repercussion on Transpacific Eastbound shipping for 8 consecutive months. In a way, it represented a welcomed and unexpected revenue stream for the carriers who are very present on this route (which aren’t always the biggest ones…). Still, the potential for a trade war has added a considerable amount of stress and numerous extra costs to the shippers or to the Freight Forwarding operators on long-term contracted cargo.
Eventually, we foresee a significant East-West Vessel upgrade with over 20,000 new TEUs vessels on the Asia-Europe trade (and maybe also the last ones…). In addition to this, we expect a significant vessel upgrade on Transpacific.