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Ocean Freight Rates Seen Rising in 2019 as Carriers Pass Along Fuel Costs

Importers and exporters can expect to pay higher ocean freight rates this year, as carriers pass along increased fuel costs, according to experts at maritime and shipping industry research and consulting firm Drewry.

During a webinar on the outlook for freight rates in 2019, Simon Heaney, senior manager for container research, said, “Expect volatile and most likely 30 percent higher bunker charges” by the end of the year, especially as the sector gets ready for 2020 mandated low-sulfur fuel to enter the price equation.

Heaney said carriers have already started and will continue to impose higher fuel surcharges to pass along the increased costs to shippers. However, with contract rates set only marginally higher and “better carrier discipline” in fleet management, Heaney sees global freight rates rising by about 6 percent this year after having risen an average of 2.5 percent in 2018.

Historically, carriers have only been able to recover half of their fuel costs when substantial increases occur. “We do believe this time they will do better than that because they have started the dialogue early,” Heaney said.

Rates were pushed higher between August and the end of November, according to Drewry, with Transpacific shipments surging in the lull period of the tariff wars and a Jan. 1 deadline for the potential imposition of 25 percent duties on Chinese imports—which was later extended to March 1.

Martin Dixon, head of research products at Drewry, said, “Supply and demand fundamentals look brighter. Bunker prices have risen early this year, but we don’t see the sharp increases like occurred last year repeating themselves.”

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Continuing, he said the “big wild card is the U.S.-China trade war that did alter trade flows.” If the current round of talks lead to additional tariffs, it will certainly impact freight rates.

“Because of the uncertainty of the tariff dispute, Drewry advises engaging in freight contracts over spot markers,” Dixon said.

A decline in transpacific freight rates drove down the composite World Container Index (WCI), assessed by Drewry, for the week ended Jan. 31. Container freight rates for eight major routes to and from the U.S., Europe and Asia fell 2.6 percent to $1,719.61 per 40-foot container or equivalent unit for the week. However, the index was still up 11.7 percent compared with same period in 2018.

Last year, Heaney noted, was a “backward step in bringing supply in line with demand” for fleet capacity, but the “reverse is expected in 2019” as carriers defer putting new ships on the water and increase demolition of old ships.

“Another important driver of freight rates is competition in the market,” he 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, Heaney said “the market has benefitted from higher rates and less price volatility.”

Even as ocean carriers are “moving toward oligopoly,” Heaney said, “competition still exists in most routes. With the market still fiercely competitive in most lanes, the carriers are still involved in predatory pricing.” Heaney sees consolidation trends continuing, even with some pushback from regulatory authorities.

Asked about the impact of the Chinese New Year period of factory closings and interrupted freight flows, Dixon said rates usually decline about 1.5 percent on routes emanating from China, and that it normally takes close to 20 weeks for the market to reset itself.