The Friday Report: June 21st, 2019

Quick wrap up of a few hot topic newsworthy stories in the supply chain logistics industry

IMO 2020:  Major Impact Coming to Global Shipping Industry

Did you know that more than 90% of all trade conducted globally occurs on Earth’s oceans?  Currently, the 39,000 vessels that power global trade operate on sulfur-laden bunker fuel.  The emissions from this fuel are causing problems on land.  This is about to change as of January 1, 2020.  The International Maritime Organization (IMO), the UN agency that is responsible for ensuring a clean, safe, efficient global shipping industry plans to implement new regulations regarding vessel fuel. 

Commonly referred to as IMO 2020, the regulations will begin enforcement of the new 0.5% sulfur emissions cap, a major drop from the current emissions cap of 3.5%.

Here are some ways that marine fuel and freight may be impacted by the regulations:

  • High sulfur fuel oil will decline in price with the decreased demand at the turn of the year
  • With the increase in anticipated refining runs, refiners are likely to realize higher profits
  • Because the cost of refining low-sulfur fuel increase fuel prices, shippers tend to travel at slower speeds, decreasing the capacity that the vessels can transport due to longer travel times
  • Diesel, a low sulfur fuel oil will likely increase in demand and price
  • Adequate fuel supply is a major concern. As IMO 2020 takes effect, fuel shortages are expected, resulting in increased fuel rates.
  • Some companies may implement scrubbers to “capture” sulfur before it enters the environment, detouring it from the exhaust to a disposal unit from which it can be discharged appropriately.

IMO 2020 is anticipated to have a significant impact on the global economy. The increase in fuel costs will result in higher freight rates, much of which will be passed on to consumers.

The environmental impact of bunker fuel is surprising.  Did you know that the world’s 15 largest ships produce more sulfur oxide and sulfur dioxide than all the cars on Earth?  These types of sulfur emissions cause harmful side effects on land including respiratory illnesses such as lung cancer and asthma, acid rain, crop failures and smog.

U.S. Trucking Industry Continues to Adjust:  Declining Freight Rates in 2019.

The trucking industry continues to adjust.  The dynamic conditions of 2018 have not smoothed out the first six months of 2019.  So far, the freight rates have dropped year-over-year for six months straight.  Manufacturers and retailers are moving less goods via truck.  Even loads on the spot market where trucking capacity is purchased on an as needed rather than contract basis has dropped by 62.6% in May year-over-year.

As factory activity continues to fall, rates have declined for independent truckers as well as for major trucking companies.  Van load rates declined 20% in May year-over-year.  Trucking company bankruptcies are making the news.  Industry analysts are forecasting weak freight through 2019 and declining truckload and intermodal contract rates in 2020.

The decrease in freight is even impacting UPS, FedEx and J.B. Hunt.  What is to blame?  Most industry insiders point to bad weather and the uncertainty of the imposition of tariffs.  After the White House threatened tariffs of 25% on $200 billion of Chinese goods in February, international air freight dropped to a three year low.  The tariffs in combination with the timing of the Chinese New Year in February resulted in an approximately 20% decline in goods shipped.

In recent months leading indicators have pointed to the continued deceleration of global trade in the near term.  Research conducted by the Federal Reserve, Columbia University and Princeton University on the 2018 trade war revealed that the trade war is costing American consumers over $1 billion a month

Amazon:  FedEx Out, 15 Boeing 737-800 Aircraft in

The recent public announcement by FedEx that it is no longer doing business with Amazon Inc. revealed its plans to focus on “serving the broader e-commerce market”.  Industry estimates project that ecommerce will increase from 50 million daily packages delivered per day to 100 million in the United States by 2026.

Amazon also stated recently that it is adding 15 Boeing 737-800 converted aircraft to its fleet through a partnership with G.E. Aviation Services.  This extends Amazon’s fleet of five leased through this partnership.  The new aircraft were needed to bump up capacity for Amazon’s Prime Free One-Day program.

In addition, Amazon has broken ground on a $1.5 billion Prime Air hub at Cincinnati/Northern Kentucky Airport (CVG).

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