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London — The container market is to face strong headwinds in 2019 as volatility in bunker prices along with growing uncertainty shrouding the impact of International Maritime Organization's 2020 global sulfur cap threatens to make negotiating bunker recovery mechanisms and overall freight increasingly challenging.

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OIL PRICES

The rapid changes in oil prices in the final quarter of 2018 have once again exposed the nagging issue of factoring bunker expenses into ocean freight.

The average monthly Dated Brent price fell by $16.67 to $64.48/b in November 2018, a whopping 20.5% drop from October's $81.15/bbl.

The final month of December brought no peace to the many markets anxiously watching the changes in oil prices. Factors like OPEC production cuts, Iran sanctions waivers and growing US crude output kept crude oil and subsequently bunker prices volatile.

The rapid changes in bunker prices in Q4 made it challenging for carriers, shippers and logistics companies to negotiate annual freight contracts for 2019. Bunker cost recovery mechanisms often use rolling quarterly averages of bunker prices in key ports to determine the baselines of dollar per container bunker charges, which go on top of the general freight.

When prices are this volatile, agreeing both bunker charges and general freight elements in container contracts becomes an exercise in frustration for counterparties, sources said.

The Platts Bunker Charge 1 index, which reflects dollar per forty-foot container bunker costs on the North Asia to North Continent route fell by $59.22 from $280.41/FEU on December 3 to $256.36/FEU on December 17.

According to shipping sources, this volatility served as a preview of what is expected to be a very turbulent year in 2019, in the rundown to IMO 2020 and the many worries that ride with it.

BAF MECHANISMS

The IMO 2020 rule change, which will see sulfur content in maritime fuel drop from 3.5% to 0.5%, is bringing a number of wild cards to the container market. Carriers will have to consider multiple factors in their Bunker Adjustment Factor (BAF) mechanisms, which include prices for 0.5% fuel oil blends, adoption of scrubbers, the spread between 3.5% fuel and low-sulfur gasoil and many others.

Already, a variety of Bunker Adjustment Factor (BAF) mechanisms for 2019 has been pushed forward by carriers under different names with multiple additional surcharges and diverse approaches towards linking bunker charges to fuel or crude oil prices and working out the overall freight.

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The ensuing confusion makes negotiating bunker charge elements in freight for 2019 increasingly difficult and chaotic with many sources questioning the BAF approach as a whole.

"It has become so complicated that even carriers themselves struggle to explain their bunker surcharges to us," said a source with a large retail company. "The periodic adjustments [of bunker charges] will wreak havoc on our costing, budgeting and auditing next year." The general lack of transparency in BAF mechanisms proposed by carriers may result in shippers pushing down on the freight element in both spot and annual contracts next year to compensate for what may be perceived as unfairly high bunker surcharges, sources said.

GEOPOLITICS

The freight part of the equation will also keep being influenced by geopolitical processes, like the US-China trade war and Brexit, both of which may culminate in the spring of 2019.

The trade tensions between the US and China provided a strong support for container freight in 2018. Each time a new tranche of US tariffs on Chinese goods was announced, shippers rushed to get their cargoes across the Pacific to beat the deadline and avoid additional charges. This resulted in significant spikes of demand and much stronger freight than expected for Q4.

According to S&P Global Platts data, the monthly average of the PCR1 North Asia to West Coast North America for November 2018 was $3,461.36/FEU, nearly double the average of November 2017 of $1,793.18/FEU.

With the effective date for the new increase of US tariffs on Chinese goods to 25% from the current 10% pushed back to March 2, 2019 from the initially planned January 1, industry participants expect another hike in demand in the first quarter of next year.

Similarly, Brexit, which is to take place on March 29 next year could bring a short-term spike in volumes on the North Asia to UK trade lane as British retailers are expected to stock up before the deadline. The PCR11 North Asia to UK index averaged at $1,289.77/FEU in November 2018.

--Alex Younevitch, newsdesk@spglobal.com

--Edited by Jonathan Loades-Carter, newsdesk@spglobal.com