The surging price of fuel means that the container shipping industry “will only break even at best in 2018,” predicts Drewry, which previously had forecast the industry would have a collective operating profit of approximately $5 billion this year.
“Carriers’ lack of cost control has come back to bite them this year. Emergency fuel surcharges should limit carriers’ fuel cost exposure in the second half, but very few lines will be in the black come the end of the year,” the London-based research firm predicts in the current edition of its Container Insight Weekly.
Drewry says the collective industry “suffered its first negative operating margin quarter in 12 months in the first quarter of 2018” and that it does not expect carriers to see operating profits (earnings before interest and taxes) “return to positive territory in the second quarter due to the fact that fuel rose even more sharply from April onwards.”
In the first quarter it says the cost of the common bunker fuel IFO380 in Rotterdam was 20 percent higher in the first quarter of 2017; in May, it was 50 percent higher than in May 2017.
The website Ship & Bunker shows the current price of IFO 380 in Rotterdam to be $423.50 per tonne, off its highs in May when it was over $440 per tonne. As recently as early March it had dipped below $350 per tonne on some days.
Maersk Line, the largest container carrier, regularly indicates what impact changing fuel costs can have on its profitability. When it reported its first-quarter financial results on May 17, it indicated that a $100 per tonne rise in bunker prices (net of expected bunker adjustment factor coverage) could reduce its earnings before interest, taxes, depreciation and amortization for the rest of 2018 by $400 million.
Emergency fuel surcharges won’t fully compensate carriers for the rising cost of fuel, says Drewry, because they only went into effect in June, and on U.S. trades they won’t kick in until next month.
Drewry says, “Profitability should improve in the third-quarter peak season, but with the fourth quarter being a seasonally slack period, industry profitability for 2018 might struggle to reach breakeven. The end-year result largely will depend on the direction of oil prices and how successful lines have been in enforcing the new surcharges.
“Given the current situation it is unsurprising that carriers are considering ways to trim their cost burden, including further slow steaming as suggested by MSC recently,” says Drewry, though MSC also has said it wants to slow ships to improve schedule reliability.
“The steep rise in fuel costs has taken the gloss off what has otherwise been a strong year for container demand,” says Drewry, pointing out that its data shows world port throughput in the first quarter rose 6 percent year-on-year.