Carriers need to develop greener supply chains

Date Added: 24 October 2019

Sharing the cost of the International Maritime Organization’s new sulphur rules  across the containerised supply chain could mark a new era of greener transportation, according to a new report from Boston Consulting Group.

Compliance with the requirement from January 2020 is forecast to cost carriers between $25bn and $30bn in additional fuel costs to 2023.

“By selling environmentally friendly services effectively, lines can share these costs with customers as well as promote the ultimate objective of greener supply chains,” Boston Consulting Group said. “The entire ecosystem of value chain participants — including freight forwarders, cargo owners, and consumers — should be willing to bear their fair share of the costs.”

Lines will feel the heaviest impact from higher costs in the first year of IMO 2020 implementation, when it is expected to reach between $10bn and $12bn. Subsequent years would see smaller annual increases due to the shrinking price differential between high- and low-sulphur fuels.

But compliance costs would not be uniform across trade routes and carriers, according to Boston Consulting Group.

“The additional cost per shipping container will depend on a vessel’s size, utilization, and speed as well as the type of technology deployed,'' it said. ``The price differential between HSFO and VLSFO will vary across bunkering ports, depending on the availability of fuels and infrastructure and the cost of transporting fuel to the port, among other factors.”

Despite this, any additional cost would be coming at an inopportune time for box lines.

“Although the major shipping liners have seen strong volume growth in the past several years, most have experienced declining profitability,” the report said. “None of the major lines has had annual EBIT margins of more than 7.5% in the past three years, and lines generally struggle to return the cost of capital.”

To sustain their balance sheets, carriers would need to find effective ways to share higher costs for bunker and overall environmental compliance with other players in the ecosystem.
But this would need to be done in an increasingly commoditised market suffering from overcapacity and where there is little perceived differentiation between service offerings. Customers can easily move cargoes from one carrier to another and can put pressure on lines to reduce prices.

One immediate change is likely to be the end of ‘all-in’ pricing, whereby contract customers are offered a single rate that does not isolate bunker costs.

Although attractive to customers, carriers understand that all-in pricing will make it difficult to recoup additional bunker costs, and have instead begun to introduce bunker adjustment factors calculated using published formulas.

These will be nothing new to contract customers, who in the past have faced bafs to counter normal fluctuations in oil prices over long contract periods.

But in the spot market there is a risk that a carrier’s commercial teams will offer discounts on BAFs in order to ensure vessels are fully utilised.

“Because such reductions will reduce operating margins, a liner should make sure that its commercial team holds the line on BAFs as much as possible,” said Boston Consulting Group.
Instead, carriers should focus on offering differentiated, higher-value services focused on reducing the environmental impact of supply chains.

“Lines should identify customers that are already implementing greener supply chains,” it said. “They should collaborate with these customers to identify opportunities to design new products and services that promote greener supply chains and create value for both parties.”

But this would require strict discipline from the carrier’s price-setting and sales teams. “It is more critical than ever for liners to establish mechanisms and key performance indicators to track price realisation and measure price leakage linked to BAFs.”

The report concludes that all participants in the sector, including carriers, freight forwarders, cargo owners and consumers, have a responsibility to ensure that supply chains became more environmentally friendly. Each would also have to contribute to offsetting the additional costs involved.

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