Regulatory Changes for Low Sulphur from January 2020
In response to the demand for ever greener and cleaner shipping, the International Maritime Organisation (IMO) has developed a binding global Sulphur cap.
Entering into force on 1 January 2020, the Sulphur cap will ensure cargo vessels use fuel with a maximum Sulphur content of 0.5%, reducing caps from the current permissible 3.5%.
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) and all these fuels have a high content of Sulphur.
But how will this affect the cargo industry? An article by morethanshipping explains:
“The global shipping industry is bracing for a key regulatory decision that could mark a milestone in reducing maritime pollution, but could nearly double fuel costs in a sector already reeling from its worst downturn in decades.”
The Impact of Sulphur Emissions
Fuels with high Sulphur oxide (SOx) emissions have a substantial impact on global air pollution, human health issues and environmental problems. Sulphur oxide is known to cause acid rain which in turn can:
- cause deforestation
- acidify waterways to the detriment of aquatic life
- corrode building materials and paints
Sulphur emissions are also a known source of respiratory disease. By reducing emissions such incidences are expected to decrease by more than 80%.
Shipping Lines React To Low Sulphur Regulation
The new regulations mean ship-owners will have to invest in compliant fuels, LNG or scrubber technology.
An increasing number of ships are using gas as a fuel, as when ignited the result is it leads to only minor SOx emissions. Methanol is another alternative, currently used on some short sea services.
Ships can meet there SOx emission obligations by implementing exhaust gas cleaning systems or “scrubbers”, these systems clean emissions before they are released into the atmosphere.
The Bottom Line
Based on industry estimates, over 90% of the global vessel fleet will rely on compliant fuels when the Sulphur regulations are in force.
MSC and Maersk expect the extra fuel costs and required changes to their vessel fleet, will cost the shipping lines an estimated USD 2 billion. Estimates for the wider global container shipping industry are closer to USD 15 billion with some estimates quoting USD 25 billion.
Scaling compliance obligations will inevitably be accompanied by scaling costs. Unfortunately, all signs are pointing to the bill being footed by importers and exporters and in turn by the end consumer.
Shipping lines, even at this early stage are looking to recoup costs or taking a more cynical view, profiteer from the changing regulation. Some lines have already implemented Low Sulphur Surcharges (LSS) on certain trade lanes.
How the IMO 2020 Impacts You
As an importer/exporter the result of this regulatory change only serves to drive up the price of shipping. Swire shipping line explains:
“With scenarios showing a possible USD2.1m per annum cost increase for smaller 1700teu vessels, or the risk of investing of USD2.5 to USD10m in scrubber equipment, no individual shipping company can shoulder the responsibility for the regulatory changes and associated cost increases. As in many businesses, an increase in costs brought about by regulatory changes is spread most often, and most fairly, amongst the customers of that industry.”
Over the next year we anticipate gradual increases in the price of shipping to cover the costs of the new requirement for Low Sulphur Fuel. At times this cost will be visibly displayed in the Bunker Adjustment Factor (BAF) price listed in your rates. The BAF rate is an additional charge added to the base rate ocean freight cost reflecting the cost of fuel (called bunkers) to be used for the voyage. This charge can be separated from the base rate freight cost because fuel costs are more frequently subject to fluctuations. However, in rates valid for a short period of time (one month or less), the BAF charges may be grouped with your freight rates and therefore you will witness an increase to your entire freight cost, caused by the IMO 2020 initiative.
If you are concerned about how the new Sulphur Regulations could impact your bottom line, contact the ICE team on 1300 CARGO1.