Fuel regulations, debt, and coronavirus hammering cargo fleets

01 April 2020 Consulting.us

The maritime shipping industry is facing a raft of challenges this year, according to AlixPartners’ 2020 Global Container Shipping Report.

Starting January 1, the regulation titled IMO 2020 requires carriers to limit the sulfur content of their fuel to 0.5%, down from the previous cap of 3.5%. The aim is to reduce the sulfur emissions of the sector, which transports about 90% of the world’s trade. The switch will lead to a spike in demand and prices for low-sulfur fuel oil (LSFO), increasing costs for shippers.

The industry is not in great financial shape already, according to AlixPartners, with many carriers saddled with heavy debt burdens, while chronic overcapacity in the past decade has led to little leverage in price negotiations.

AlixPartners’ 2019 report estimated LSFO adoption would drive up fuel bills by at least $10 billion globally. The firm says the estimate is close to reality, though it may understate the magnitude of the increase somewhat.

Average Altman Z-score

“The very survival of some carriers will depend on their ability to pass their higher fuel costs along to their customers,” states the report. “In that context, carriers face a vital strategic choice: whether to burn LSFO or to invest in scrubbers that would enable them to continue to burn intermediate-fuel-oil (IFO).”

2019 built on the financial anxiety of carriers. The Altman Z-score measures a company’s credit strength and the likelihood of bankruptcy in the next 24 months, with a score of 1.8 or lower signalling a high risk of bankruptcy. The Altman Z-score of 14 container shipping companies in the 12 months ending on September 30, 2019 deteriorated from 1.35 to 1.16 – the lowest in the 10 years AlixPartners has tracked the metric. Meanwhile, the industry’s total debt grew by $21 billion in the same time period.

At a time when carriers are already vulnerable, Covid-19 has added further disruption, with container volumes at Chinese ports falling off sharply since the outbreak began.

A report from Alphaliner found that quarantines have led to a record amount of blank sailings, with inactive fleet size swelling to 2.04 million twenty-foot equivalent units (TEUs), or 8.8% of global capacity.

The Port of Los Angeles in February expected a drop of 25% in year-over-year volume for the month, as a result of coronavirus disruption.


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