The final quarter in 2019, and the end of the decade, continued to present challenges for the industry and was slower than the seasonal norm. There was a ‘lacklustre’ peak season, resulting from market unease created by the US-China trade war, a softening European market and the looming IMO’s new fuel regulations.
The Shipping industry continued in Q4 to adjust capacity to balance supply and demand. Blank sailings – a sailing that has been canceled by the carrier when the demand for space is low in order to ensure that vessels are full – were used by carriers to manage capacity. The end of the peak season is usually the main reason why blanks sailings happen at this time of the year. But throughout the quarter, blank sailing announcements peaked more than usual, thanks to the upcoming IMO 2020 regulations. The new regulations made some carriers pull their vessels out of rotation in order to equip them with scrubbers that will allow vessels to clean fuel, in order to meet the IMO’s low-sulphur requirements.
The global sulphur fuel cap continued to make an impact with shipping lines separating the bunker (fuel) element of the freight rate from the freight cost to limit the exposure of the fuel cost escalation. All shipping lines were preparing for the change in sulphur regulations in readiness for compliance with IMO 2020.
In Europe the unease from Brexit and the possibility of a ‘no deal’ continued to create much uncertainty. However the uncertainty around Brexit came to the beginnings of a resolution with the landslide general election victory for the Conservative Party in December. The new government is set to use its large majority to take the UK out of the EU by 31 January 2020, entering a transition period when the next stage of negotiations will begin.
The Air industry saw the first positive year on year growth in December 2019 showing signs of the beginnings of a recovery. The main growth came from China to North America and China to Middle East predominantly driven by the technological industry: high tech companies needing their devices and accessories delivered fast and in big quantities for the Christmas market.
Exchange rates were still low as a result of Brexit uncertainty which offset the present low market rates, however there was a temporary bounce back of the pound immediately following the decisive election results.
The general economic outlook globally continues to be uncertain. Trade and geopolitical tensions threaten to retain the slowing of global economic growth. Predicting where the market will be in a month’s time is proving to be harder and harder, as there are various parameters in play.
The beginning of 2020 saw renewed tensions between the US and Iran escalating considerably and once again brought to the forefront the possibility for further geopolitical instability and disruptions to the global economic ecosystem (including along with it the shipping markets).
The continuing trade tension saga between the US and China was the focus this week, with Phase 1 of the trade deal between the two countries being signed. The agreement has been hard-fought, but it is unclear how much economic relief from their trade war it will offer. Tariffs – in some cases at a lower rate – will remain in place.
At the end of this month, we also expect Britain to leave the EU, a step that will bring the UK to the next phase of the negotiation process where the future trading relationship between the two sides will be discussed. The result of these negotiations and the impact that they may have on the global economy is still fairly sketchy.
The Shipping market is now adjusting to the implementation of the IMO’s new regulation that will see the sulfur content in marine fuel drop from 3.5% to 0.5% and the knock-on effect on fuel prices and associated freight rate. The BAF mechanism that was in place in 2019 has been rolled over into 2020 – the difference being that the barometer is the cost of Very Low Sulphur Fuel Oil (VLSFO) instead of the IFO380 (Heavy Fuel Oil). The cost for this grade of fuel is significantly higher than the Heavy Fuel Oil. The cost variance as we enter 2020 is in the range of USD 200-250 per 40’ container. Carriers will try to protect cash flows by restricting capacity as best they can, through a combination of measures, including further slow-steaming, more blank sailings, and off-hiring of chartered vessels. As such, the level of disruption that the switchover will bring is still not wholly clear.
However, on a more positive note, there is new optimism in the Air Freight industry since entering the new year. After a dismal year in decline in 2019, the market is finally seeing growth, due to increasing demand in Asia Pacific.
As we now approach the Brexit deadline on 31 January, we will work with our customers to ensure any impact is clearly communicated as trade negotiations take shape over the year. As the Brexit picture finally comes into focus we will facilitate our customers to comply with the new regulations that will be required.
We would like to thank all of our customers for their support in working with us in the lead up to the busy Chinese New Year period. We look forward to what we hope will be a prosperous year ahead for all.