As the deadline for the enforcement of the IMO 2020 regulation is coming closer, carriers are getting anxious about its overall impact. Main concerns arise on whether the Owners and operators are able to afford the additional expenses resulting from applying the new regulation, such as unrecoverable bunker expense (BAF), investment costs to install scrubbers or financing cost for extra bunker credit.
According to the shipping consultancy Drewry, IMO low-sulfur regulations could make fuel prices jump and subsequently put more pressure on financially vulnerable carriers in the liner industry. Despite the fact that the improved market conditions during the 2nd half of 2018 enabled the containership operators to return a consolidated profit of around $1.50 billion, a spike on bunker prices due to the new regulations might be enough to push the industry back to red.
Specifically, an expected premium of $200 per ton of the VLSFO over the HSFO, could add approximately $2.5m of cost to an average Asia-North Europe round-trip, it has been estimated, driving a profitable route into the red, unless the carriers succeed to pass on the bunker adjustment factor to their customers, something which still looks unclear.
Drewry said that, “without wanting to be too alarmist”, the fallout from IMO 2020 “could inspire another major carrier bankruptcy”, while another potential consequence for the industry would be to “trigger more defensive M&A” activity among the liner companies. “It could turn out that the IMO will inadvertently push industry consolidation along, closer to where it needs to be in order to achieve sustainable profitability”, Drewry continued.
In the meantime, not all the liner companies share the same opinion on whether the M&A activity will continue, showing that this is another area in regards with the IMO 2020 that remains cloudy. The CEO of Maersk at last month’s TPM Conference in Long Beach expressed the opinion that consolidation will continue while the CEO of Hapag-Lloyd, Rolf Habben Jansen, told during a breakfast meeting at the same event that consolidation has “probably reached its limit”.
While previous M&As have lead to a high market consolidation, where the leading seven carriers are now controlling approximately three quarters of the world’s containership fleet, higher competition still exists in some of the main large-volume and revenue generating routes (e.g. East-West routes) and these might be the ones which might be affected the most due to an increase on expenses.
However, Drewry concluded: “Even if IMO 2020 does spur another round of industry consolidation, the chances are that there will still be enough carriers left to prevent the big trades from being highly concentrated. It will require a couple of highly unlikely mega M&As to really move the dial.”