Rough waters ahead!

Currently, modern commercial ships run on fossil fuels which have a high content of sulphur (3.5%) – known to be harmful to humans and the environment. Beginning January 1, 2020 low-sulfur fuel (0.5%) is required for those ships that are not equipped with air scrubbers. The added cost of the new fuel could have serious implications for all modes of delivery around the world. Here in the U.S., the East Coast vs West Coast battle for business is about to heat up.
In 2016, the International Maritime Organization (IMO), the regulatory authority for international shipping, set January 1, 2020 as the compliance date for the reduction in the sulphur content of shipping fuel oil.
Roughly 90% of international trade is carried by the shipping industry where it is delivered by commercial ships to a port of choice (the “long mile”). Once off the ship, that delivery continues over land to long distance destinations often through rail (“middle mile” 15.5% of goods). Shorter distances finish the delivery through the use of trucking (“final mile” 65.5% of goods).
A whole slew of factors go into choosing a port for delivery i.e., the route(s), the direct port cost(s), the size of the ship vs the port, the costs of fuel, rail and truck, and labor issues, etc. Currently, the cost of shipping fuel is estimated around 3% of the value of the cargo. The new low-sulfur fuel is projected to nearly double that cost.
For certain areas of the world e.g. China (the largest importer to the U.S.), delivering to the U.S. West Coast is closer by half than the East Coast. The burn on fuel to the East, as some analysts claim, makes West an easier choice and will divert shipments West. However, considering recent tariff increases on Chinese goods as well as a doubling of the fuel cost, no stone will be left unturned in finding the best routes, modes and efficiencies to complete those shipments. Alternate ports of origin that deliver to the East coast are likely options.
Enter into the equation the Panama Canal.
The Panama Canal benefits when ships choose their locks to travel to the Eastern U.S. and beyond and they are not sitting idly by losing that business. Beginning January 1, 2020, a new set of transit tolls will take place for shippers traversing the Canal’s locks which will incentivize carriers based on the amount of containers they bring.
For container shippers that transit between 1.5-2 million TEU of total capacity in a 12-month period, they will receive a $3 per TEU reduction in tariffs for one month; those with 2-3,000,000 TEU receive a $3.25 reduction; and those exceeding 3 million TEU, a $5 reduction.
While some analysts are adamant that West ports will continue their dominance over East, in spite of the tariff war, Deutsche Bank’s transportation analyst Amit Mehrotra believes otherwise. In April, Deutsche Bank downgraded JB Hunt (JBHT – NasdaqGS) from Buy to Sell based on their research that U.S. import volumes will shift east, shrinking the middle mile and forcing the company to compete with trucking. Mehrotra highlights year-over-year declines in the length of haul for the “middle mile”, substantial infrastructure investments by eastern ports, statistics from companies like JB Hunt and the simple fact that the majority of the U.S. population resides in the East to support his opinion. Mehrotra believes the reduction in middle-mile distance is a trend that will not only send ships east, but favor trucking over rail as it remains a better fit for shorter distances.