If you are in the shipping and freight industry you may have heard several whisperings, notices, loose talk, official talk, speeches etc about IMO 2020 regulation..
But what is this
#IMO2020, who will be impacted and how will it affect your life in the shipping and freight industry..??
Before that, here is a bit of background on this subject..
Currently, all modern commercial ships run on fossil fuels such as MGO (Marine gas oil), MDO (Marine diesel oil), IFO (Intermediate fuel oil) , MFO (Marine fuel oil), HFO (Heavy fuel oil) collectively known as bunker fuel..
These fuels have a high content of sulphur which is quite harmful to the environment..
The International Maritime Organization (IMO), the regulatory authority for international shipping, has been working to reduce the harmful impacts of shipping on the environment since the 1960s..
The regulations for the Prevention of Air Pollution from Ships (Annex VI) seek to control airborne emissions from ships (sulphur oxides (SOx), nitrogen oxides (NOx), ozone-depleting substances (ODS), volatile organic compounds (VOC) and shipboard incineration) and their contribution to local and global air pollution, human health issues and environmental problems..
The main changes to MARPOL Annex VI are a progressive reduction globally in emissions of SOx, NOx and particulate matter and the introduction of emission control areas (ECAs) to reduce emissions of those air pollutants further in designated sea areas..
In 2016, at the 70th session of the Marine Environment Protection Committee (MEPC) meeting in London, the International Maritime Organization (IMO) took a landmark decision setting 1st January 2020 as the implementation date for a significant reduction in the sulphur content of the fuel oil used by ships..
As per this decision, MARPOL Annex VI has been revised, lowering the current global limit for sulphur content of marine fuels from 3.50% to 0.50% as from the 1st of January 2020..
This is what IMO 2020 means and stands for..
How will the lower sulphur emission standards be achieved..??
IMO has advised several methods through which ships can meet lower sulphur emission standards..
- Using low-sulphur compliant fuel oil;
- Using gas as a fuel as when ignited it leads to negligible sulphur oxide emissions;
- Using methanol as an alternative fuel as being used on some short sea services;
- Using exhaust gas cleaning systems or “scrubbers”, which “clean” the emissions before they are released into the atmosphere.
Naturally, such compliance requirements bring along with it additional costs and uncertainty in terms of fuel costs for shipping lines and customers..
What will be the impact of IMO 2020 on shipping lines..??
According to industry estimates, more than 90% of the global vessel fleet will be relying on compliant fuels when the sulphur rules step into force on 1 January 2020 and lines will need to invest in different technologies and operational investments such as scrubbers etc..
If you are a shipping line, like MSC or Maersk you will be exposed to huge costs in preparing your ships to meet the required standards..
MSC estimates that the cost of the various changes that will need to be made to their fleet and its fuel supply is in excess of two billion dollars (USD) per year and that they have already started incurring these costs to be ready for 2020..
Maersk Line expects its extra fuel and compliance costs to exceed USD 2 billion based on expected differences in price between the current 3.5% bunker fuel and the compliant 0.5%..
#TPM2019 Rolf Habben Jansen, CEO of Hapag Lloyd mentioned that they are expecting their low sulfur fuel costs to be around USD75-100 million during the 4th Quarter of 2019 in order to be ready for IMO 2020 implementation date of Jan 1, 2020..
In order to comply with the IMO 2020 regulation, shipowners will first need to check their financial position, whether they can access funds for a scrubber, can they pay for extra fuel costs, or whether can take a cut in profits from higher fuel bills in 2020 – or pass the cost on to their customers..
The line will also need to assess the service routes of their ships, negotiate with bunker suppliers at their regular bunkering ports about the availability and price of low sulphur fuel..
They will need to decide about what happens in instances they are found to be non-compliant or how this may affect their standing in the market, support from shareholders, investors, regulators etc..
Lines will also be checking on how their competition is handling this regulation and will surely look for the least painful method of coping with the sulphur cap..
Overall, the global container shipping industry is expected to spend up to USD 24 billion in trying to be compliant with the above requirements..
They are doing this through the implementation of new or adjustment to existing fuel surcharges, which may vary based on the trade lanes..
So how is this surcharge different from BAF..??
For now, the use of fuel oil on board the ships is unavoidable.. Oil prices are quite volatile, and in order to counter the fluctuations in oil prices, the shipping lines charge Bunker Adjustment Factor (BAF) as a surcharge on top of the ocean freight..
This BAF is usually aligned with the movement of the oil prices much like the fuel for our cars.. When oil prices go up, BAF goes up and when oil prices come down, BAF also comes down..
While BAF is designed to recover increases in bunker related costs the compliance costs have not been catered for by any of the shipping lines..
This additional surcharge being charged by the shipping lines is to cater for these compliance costs..
What will be the impact of IMO 2020 on cargo owners..??
Well, the shipping lines have made their intentions clear by implementing additional surcharges to cover for these extra costs that they will be incurring to operate their ships on cleaner fuel..
They have categorically announced that they are not going to pay for these costs alone as environmental protection is everyone’s baby..
So naturally either the seller or buyer will have to foot the bill for these additional surcharges..
These type of surcharges will form an interesting part of price negotiations in a sales contract between a seller and buyer as these are new charges and may not have been included thus far in the negotiations..
Depending on the shipping line and trade, Low Sulphur Surcharges range from a low of USD5/20′ to a high of USD35/20′ and a low of USD10/40′ to a high of USD70/40′..
If you are a shipper that ships around 10,000 containers a year, you could end up paying USD50,000 on the low end to USD350,000 on the high end if you ship only 20’s or USD100,000 on the low end to USD500,000 on the high end if you ship only 40’s only for this surcharge..!!
Many small volume shippers are nervous that they will end up paying the bulk of these new surcharges compared to the larger volume shippers because they don’t have the volumes to demand a separate BAF formula and may be forced to accept the surcharges imposed by the carriers..
Each line calculates these surcharges in different ways as there are several factors such as services, trade lanes, the efficiency of ships on these trade lanes, the weight distribution on the head haul and backhaul, consumption per day, port stays etc..
There are of course options for cargo owners to choose greener fuel options and programs like the one Goodshipping program is running..
But initiatives like this are just starting out and there is still a long way to go before it comes into the mainstream of global trade and shipping..
Ahead of #TPM2019, Peter Tirschwell opined that “the chief worry for the container shipping industry remains what it has already been for months: that carriers will fail to pass through enough costs related to low-sulfur fuel and will be forced to withdraw capacity, seeking to get out of the spot rate what they could not get out of surcharges.”
Carriers are already speaking openly about the risk of bunker fuel surcharges being rolled into the base rate..
Shippers are questioning and resisting freight forwarders’ attempts to pass along recently introduced low sulphur surcharges in many ECAs..
As per Sandeep Sayal, vice president of downstream research at IHS Markit, “The rapid pace of the implementation of this new regulation is making it very challenging for the refining and shipping industries to respond”..
Stephen Jew from IHS Markit is of the view that IMO 2020 will be hugely disruptive and uncertain because of the rule’s global nature, short timeline for rollout, and the uncertainty around compliance that ultimately determines demand..
At the end of the chain, these surcharges and additional costs being implemented for compliance with IMO 2020 will be passed on from the service providers to the carriers to the shipper to the buyer and eventually to you and me as Joe Public in the cost of the products we buy..!!
So brace yourself…………………..!!!