Box lines' fuel surcharges are 'justified'

Responding to criticism of container lines from shipper representatives that claimed recent so-called ‘emergency bunker surcharges’ applied by lines could not be justified, Gary Ferrulli, a former senior liner executive and now chief executive of Global Logistics & Transport Consulting, told Lloyd’s List that with oil prices rising 70% in 18 months, the mistake of carriers was in failing to apply fuel surcharges last year.

He said the reports on whether the fuel surcharges are fair were being mixed with the wider issue of how carriers price — a topic where he is also highly critical of lines.

But he added that arguments about the fairness of fuel surcharges focused on fuel costs rising 20% in first four months of 2018 — rather than prices going up 70% since January 2017.

The question instead should be why there had been no fuel surcharge until now, he said.

 “The carriers have done the wrong thing; they ignored the fuel increases until now, even entering some contracts in the transpacific with a no-fuel surcharge clause in them, or a cap on the surcharge. So now they are taking frantic action to implement any number of surcharges.

 “But basic economics of business says if a cost with the impact of fuel goes up 70% in 18 months, you have to recover it. It is not unfair; what is unfair is if they do not charge and collect it.”

One of the key criticisms of shipper representatives was that lines appeared to be applying emergency bunker surcharges “almost simultaneously”, a move that the European Shippers’ Council described as “tantamount to price signalling”.

But Mr Ferrulli has a different interpretation of why lines suddenly started taking action in May.

 “They woke up after seeing first-quarter results,” he said.

He said the reason was much more about unrealistic and poorly developed pricing strategies rather than any question of collusion.

“Carriers are their own worst enemy,” he said. “Recall Hanjin’s demise in August 2016 — rates rose for four months, as did volumes, with the absence of such a huge service provider. Rates then dropped, as carriers pursued market share, did not manage capacity, yet still made money.

 “When carriers see quarterly profits improve for a period, they become mesmerised and revert to historical bad habits. So during the 2017-18 transpacific service contract season, they hurt themselves by not taking advantage of the market change to increases rates and better manage capacity.

 “They virtually ignored the fuel increases in 2017 because they were making money. Those decisions lead us to the first quarter 2018 results as the transpacific contracts ran through April 2018, turning out to be poor decisions.”

Source: Lloyd’s List