16.12.2019 14:06:49 //
Juha Peltonen
Timo Porthan

Sulphur Directive may add up to a fifth to cargo prices

Maersk, the world’s largest shipping company, calculates that it will spend a billion dollars more on fuel next year than it did this year. Investments are also being made in ships as a result of the Sulphur Directive. Maersk Finland’s Managing Director, Michael Enberg, estimates that cargo prices may have to be raised by up to a fifth in some areas.

The Sulphur Directive will come into force globally at the beginning of next year. It has been imposed by the UN’s International Maritime Organisation (IMO). IMO 2020 specifies that the sulphur content of fuel used by ships must not exceed half a per cent. The most commonly used fuel to date has had a sulphur content of 3.5 per cent. Since 2015, the Baltic Sea has already imposed a stricter sulphur limit of 0.1 per cent, which covers traffic heading from the Baltic Sea region to the oceans.

In the future, the use of high-sulphur fuels will require sulphur scrubbers or other techniques for lowering sulphur emissions. The Danish company Maersk has the world’s largest fleet of container ships, but only about a tenth of its 700-plus vessels are equipped with sulphur scrubbers.

“We, at least, have considered sulphur scrubbers to be a short-sighted solution. Almost all shipping companies have made some level of investment in them, but globally more low-sulphur fuel is being used than scrubbers,” says Maersk Finland’s Managing Director Michael Enberg.

Low-sulphur better than scrubbers

Shipping companies have been cautious about investing in sulphur scrubbers, as they expect the near future to bring new directives governing other emissions for which scrubbers will be of no help. Even a sulphur scrubber for a small ship may cost up to EUR 3 million, and it will also take up space onboard.

“If the introduction of new requirements means that we end up using scrubbers for only a short period, then it’s a better long-term bet to use fuels that will pass all emission regulations.

Low-sulphur fuel costs a few hundred dollars more per ton than high-sulphur fuel. When the Directive comes into force, there may not be enough low-sulphur fuel available, which will keep prices high. In theory, however, rising demand will lower prices.”

“It will take six months to a year for us to see the actual impact. It will also be interesting to see what happens to the price of high-sulphur fuel when it’s used less. Everything is currently based on calculations and estimates,” says Enberg.

Maersk estimates that its fuel bill will be about one billion dollars higher next year than it was this year. According to Enberg, this means there is pressure to raise cargo prices by about a fifth.

“It’s a significant amount. There’s a big question mark over how the markets will react – will shipping companies be able to transfer these costs to their customers?”

A hazy outlook for next year

Uncertainty over next year’s fuel costs is not the only factor weakening predictability in the shipping industry. Market growth in container cargo, which is Maersk’s bread and butter, is forecast at about one to two per cent over the coming years. The growth rate has stood at about 3–7 per cent for many years, but has recently declined on a global scale, partially as a result of trade barriers.

“We’ve estimated that, this year alone, global trade restrictions have had a negative impact of between half and one per cent on container transport. Next year the negative impact will be about one per cent. Both Russian sanctions and trade relations between China and the USA have had a major impact, and there are a lot of open questions still surrounding them,” says Enberg.

Economic growth has also slowed in Finland.

“Exports are continuing to grow in monetary terms, but not in terms of absolute volume, and particularly if you consider our main areas outside Europe.

The shipping industry has long been operating at overcapacity, which will immediately lead to falling prices when growth slows.

“The industry is living on large volumes and low per-unit costs. Shipping companies have over-invested in their vessels, in the belief that the world economy will continue to grow at the rate it has been.”

Investments in ships are made with an eye to the future. It will take about two years for a ship to enter service after the investment decision has been made, and it will have to operate for fifteen to twenty years. The majority of container ships are built in China and Korea. Shipping companies have only started to put the brakes on new acquisitions in the last couple of years.

Finland has too many ports

About a fifth of Maersk’s cargo in Finland passes through the Port of Helsinki. From a shipping company’s perspective, Helsinki is a typical general port. The majority of Finland’s imports pass through the Port of Helsinki before being forwarded to centralised distributors, and it also handles exports from the forestry and other industries.

The Ports of Kotka and Rauma do not handle that many imports. In practice, all forestry industry products are transported in containers that must be delivered to the export port empty. Shipping companies primarily use their own containers. Maersk has its own container factory in China.

“One advantage of Helsinki is that it has a better container balance. This reduces shipping companies’ costs and makes cargo more competitive. Metsä Group’s new terminal in Vuosaari increased exports and therefore slightly altered this balance, as more empty containers are being brought to Helsinki than before.”

Enberg is also satisfied with the way that the Port of Helsinki acts in its customers’ best interests.

“The Port cooperates in a supportive and solution-oriented way. Investments have enabled large cargo volumes to pass through the Port of Helsinki. Shipping companies can bring larger ships and thereby lower their per-unit costs.”

The Port has been very active with regard to shipping companies.

“Cooperation with the Port of Helsinki has been excellent, both under the current director and his predecessor. I would even call it proactive, which isn’t necessarily characteristic for us Finns,” says Enberg.

Enberg hopes that the government will prioritise investments. 

“Not to put too fine a point on it, we have a ridiculous number of ports. We must consider whether small amounts of money should be focused on the areas with the largest cargo flows, in order to boost efficiency.”

Enberg reminds us that shipping is one of Finland’s economic growth enablers, as the majority of the country’s exports are transported by sea.

“In order to be competitive in both exports and imports, Finland’s cargo flows must be consolidated, so that usage rates will rise and per-unit costs will fall,” he says.

Containers are loaded at ports

Shipping companies also provide services on land. Maersk does not have its own trucks. The company’s road transport is handled through its subcontractor network. Services include import and export declarations, warehousing, and supply chain control. Road transport accounts for about ten per cent of Maersk’s volume in Finland.

“Finland is a special country in this respect, as a lot of our exports are loaded into containers at ports rather than production facilities. That’s why there are fewer containers being transported by road than in many other countries.”

A typical operating model in the forestry industry is to transport goods to ports by train, and then load them into containers there. Large companies have signed affordable contracts with the national rail company, VR. Forestry companies also have partial holdings in port operators, and thereby receive synergies from loading containers at ports. However, shipping companies are also interested in road logistics.

“When you drive out of Helsinki, you can easily see that investments are not being made in the country’s highways. Considering the amount of tax revenue that is made from transport, I would hope that more funding could be allocated to maintaining our road network.”

The shelving of the Helsinki central tunnel project will not directly impact Maersk’s business, as its cargoes arrive in Vuosaari by truck via Ring Road III. However, the potential transfer of passenger traffic to Vuosaari is causing some concern.

“It would cause traffic jams for us as well. Vuosaari was planned as a cargo port and does not therefore have the infrastructure required for passenger traffic. It sounds rather far-fetched to nullify all the investments that have just been made in the new terminal at the West Harbour, and then make new investments. It would also require quite a lot of re-planning in the Vuosaari area. It’s not a very big area. There’s not room to fit everything in. Cars and trucks would have to share the road.”

The shipping industry is consolidating

Over the past decade, the shipping sector has consolidated through both corporate acquisitions and bankruptcies. There are about a dozen large container shipping companies in the world and they handle about 80 per cent of traffic – led by the ten most significant global companies.

The cargo business has gone completely digital over the past five years. As each shipping company has its own system, a number of global customer portals have sprung up. The main ones are Inttra, GT-Nexus and Cargosmart.

“These portals have accelerated digitalisation. If a client uses five shipping companies, they don’t have to link to five different systems,” says Enberg.

Almost all cargo clients use several shipping companies.

“It’s rare to concentrate on a single company, especially if you’re trading on several continents.”

Thanks to digitalisation, the country’s largest container shipping company only needs Finnish personnel working at its customer interface.

“Administration and documentation have been transferred abroad. All thirty personnel are working in customer service and sales. When I joined Maersk ten years ago, there were 65 of us. Cargo volumes have tripled over the same period. This demonstrates the kind of efficiency you need to have to reach the top.”

For Enberg, February will mark forty years in the business. He has already announced that he will be leaving Maersk.

“I’ve been in charge of a number of different companies since 1988, and I’ve come to the conclusion that I’ve done my bit.”

Enberg will not, however, be retiring – he’s going to wait and see what the future will bring.

“I’m interested in tasks that will enable me to use my forty years of experience.”