With ocean carriers expected to pass an estimated $10 billion in expenses along to shippers, and with the IMO 2020 looming, it’s time to make sure your global supply chain is ready for some unanticipated volatility.
Shipping via ocean carrier could get a bit more expensive in the coming months if shipping companies decide to pass along about $10 billion in expenses to their customers. A recent Wall Street Journal article detailing the situation noted that sagging global trade, rising fuel costs, and low freight rates are working together to create new headwinds for the ocean shipping sector.
“From slowing global trade to rising fuel prices to capacity increasingly out of step with demand, container-shipping operators are facing new challenges over the next two years,” Costas Paris writes in A Storm Is Gathering Over Container Shipping, “hurting prospects for a recovery after nearly a decade of moving in fits and starts toward stability.”
New regulations like IMO 2020 are pushing carriers to find cleaner—and more expensive—ways to fuel their ships. Beginning January 1, 2020, the limit for sulfur in fuel oil used onboard ships operating outside designated emission control areas will be reduced to 0.50% m/m (mass by mass) versus a previous limit of 3.50% m/m.
Higher Rates Ahead
Quoting Drewry’s Simon Heaney, Sourcing Journal says importers and exporters can expect to pay higher ocean freight rates this year, as carriers pass along increased fuel costs. Expect volatile and most likely 30 percent higher bunker charges by the end of the year, Heaney said in a recent webinar, especially as the sector gets ready for 2020 mandated low-sulfur fuel to enter the price equation.
Historically, carriers have only been able to recover half of their fuel costs when substantial increases occur, according to Sourcing Journal. “We do believe this time they will do better than that because they have started the dialogue early,” Heaney said.
Carrier consolidation isn’t making the rate equation any fairer for shippers. “Another important driver of freight rates is competition in the market,” Heaney said, noting that the top 10 carriers now control more than 80 percent of the market compared to 55 percent in 2005. As a result of consolidation, the market has benefitted from higher rates and less price volatility, Sourcing Journal reports.
5 Ways to Work with Your Logistics Provider
Here are five strategies that all shippers can use to navigate the changes that are taking place in ocean trade right now:
Focus on total spend, not on rate. “Trying to negotiate contract rates at the lowest possible level will ultimately wind up costing you more,” JOC points out. “Rather than trying to nickel and dime contract rates, focus on choosing a reliable carrier who will keep your shipments on time and on budget.”
Work with an integrated logistics provider. Find one that can perform a variety of end-to-end, logistics service activities that include ocean, rail, air, warehousing and other value-added services. These will come together to make up a total logistics services package, and one that will help you achieve success in any transportation market conditions.
Weigh the benefits of BCO status. For shippers with large importing operations, attaining beneficial cargo owner status can make it easier to access cost-effective capacity on specific trade lanes. If you’re new to the application process, an external supply chain provider like DB Schenker can ensure it’s done correctly while also freeing up your team’s time to focus on more important tasks.
Use technology to your advantage. If you’re not already working with a logistics provider whose technology provides full supply chain visibility and knows the status of all shipments at any given time, find one. You can also invest in your own technology (i.e., transportation managements systems, global trade management systems, etc.) that enable good supply chain visibility in business world that demands it.
Expect – and prepare for – the unexpected. If 2019 brings more canceled sailings, JOC says that an outside provider with a deep network of relationships can be invaluable in accessing affordable spot capacity. “A little logistics creativity, such as changing the port of discharge for cargo traveling inland,” it adds, “can also help lessen the impact of disruptions.”
“As the industry contends with ongoing trade talks, rising fuel costs, carrier consolidation, and more, 2019 will be a pivotal year in determining the balance of supply and demand in overseas shipping,” JOC adds. “With the right combination of supply chain technology, business processes, and experienced support, you can sail through the ups and downs of the year ahead.”
Shoring Up the Global Supply Chain
As we get deeper into 2019—and closer to the IMO 2020 deadline—shippers that are working closely with reliable logistics providers will have the best chance of maintaining their rate levels while ensuring good service levels from their carriers.
DB Schenker works with most of the world’s ocean carriers, so the company tends to have more leverage than an individual shipper would when it comes to negotiating rates, terms, and incentives with them. This is just one of many reasons why companies should make 2019 the year that they align with an end-to-end logistics provider that can take the burden of ocean freight management off their plates.