In response to the demand for ever greener and cleaner shipping, the International Maritime Organisation (IMO) developed a binding global Sulphur cap which entered into force on 1 January 2020.
The Sulphur cap aims to ensure cargo vessels use fuel with a maximum Sulphur content of 0.5%, reducing caps from the formerly permissible 3.5%.
Modern commercial ships have traditionally run on fossil fuels such as MGO (Marine gas oil), MDO (Marine diesel oil), IFO (Intermediate fuel oil), MFO (Marine fuel oil) and HFO (Heavy fuel oil). All these fuels have a high content of Sulphur.
So how will the new cap affect the cargo industry, especially in the midst of the Coronavirus pandemic?
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
Shortly after IMO 2020 came into effect, the IMO highlighted 5 key changes intended from the introduction of the sulphur cap:
- Cleaner air – a 77% fall in overall SOx emissions from ships. It’s expected there will be a yearly drop of around 8.5 million metric tonnes of SOx.
- Improved human health – Sulphur is known to cause respiratory, pulmonary and cardiovascular illnesses, often leading to premature deaths. A sulphur cap is expected to overall improve human health by preventing these diseases.
- Higher quality fuels – Most ships are expected to switch to higher quality, low sulphur fuel oil in order to meet their obligations under the new limit.
- Adapting – The IMO notes that ship operators, owners and refineries have adapted to the new sulphur cap. This will help everyone be prepared for the new cap.
- Compliance – Enforcement authorities around the world including port and flag states will be granted the power to ensure ships comply with the new cap.
Shipping Lines React To Low Sulphur Regulation
The new regulations mean ship-owners must 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 their SOx emission obligations by implementing exhaust gas cleaning systems or “scrubbers”, these systems clean emissions before they are released into the atmosphere.
Impact of COVID-19 on Sulphur Regulation
It was reported that parties in the international shipping industry were complying with the new sulphur cap. But the disruption to global shipping and freight caused by the Coronavirus possibly means enforcement of this cap will be less of a priority for many maritime enforcement agencies.
A case in point is the United Kingdom Maritime and Coastguard Agency’s announcement that they will be suspending sulphur cap compliance checks as part of COVID-19 containment efforts.
Such measures will make it difficult to accurately assess the complete impact of IMO2020 on the shipping and logistics industries and its effectiveness towards improving environmental and human health.
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.
Despite this, the onset of COVID-19 may mean events will pan out differently to what the industry expected.
How the IMO 2020 Impacts You
As an importer/exporter, the traditional view was that this regulatory change would drive up the price of shipping.
However, the onset of COVID-19 led to an oil slump. Throughout March 2020, the spread in prices between very low-sulphur fuel oil (VLSFO) and high-sulphur fuel oil (HSFO) fell steeply. There was 35 per cent fall in VLSFO bunker prices between January and early to mid-March.
Not many industry players could have possibly foreseen the significant fall in marine bunker prices.
During December 2019 and January 2020, initial research did show that bunker prices increased around 35-45 per cent. But this evaporated quickly as the Coronavirus pandemic caused international oil demand to freefall.
Philip Damas, head of Drewry Supply Chain Advisors, noted positive news that “the fuel part of ocean freight rates paid by shippers will fall and that the underlying bunker costs of shipping lines will also be much lower than previously expected. The extra cost of the IMO 2020 rule will be deferred until the global economy normalises”.
We don’t expect this to be an indefinite trend. We strongly advise keeping an eye on latest VLSFO prices so that shipping operators can ensure they are able to take advantage of any fall in prices. We also advise that shipping operators do not take advantage of any perceived lack of enforcement by port and flag states so that, when the global situation normalises, they are adequately prepared to meet their IMO 2020 obligations.
If you are concerned about how the new Sulphur Regulations could impact your bottom line and how COVID-19 will have an effect, contact our friendly team for a tailored consultation.