By: Mollie Bailey, Vice President, International, Transplace
Earlier this year, we shared some important information about the International Maritime Organization (IMO) announcing a new standard regarding the acceptable levels of sulfur oxides (SOx) emissions in bunker fuel – all in an effort to reduce air pollution from container ships.
With less than six months to the full implementation of the emissions standard, there is still uncertainty throughout the global shipping industry about its overall impact. Below, I’ll examine what shippers need to know about the new fuel guidelines and discuss how it could affect their business.
Changes to Global Fuel Guidelines
Beginning on January 1, 2020, all vessels worldwide will only be allowed to use fuel with a maximum sulfur content of 0.5% – significantly lower than the current 3.5% sulfur cap. According to the IMO, “This will significantly reduce the amount of sulfur oxides emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”
In order for shipowners to become compliant with the new IMO standard, they have three options:
There has been speculation around which compliance strategy the majority of shipping companies will choose as they weigh the cost and benefits of each option. Adrian Tolson, director of 20|20 Marine Energy, forecasts the market going 55% to VLSFO, 25% to MGO and 20% to HSFO and using scrubbers to extract sulfur.2
Regardless of which option they choose, there will be significant cost involved. This is especially true for those choosing to fuel vessels with VLSFO, which is expected to cost 55-65% more than the “bunker” fuel most commonly used to power ships.3 There are also concerns surrounding the availability of VLSFO relative to demand and uncertainty as to how the new fuel will perform in the existing engines, which could result in additional mechanical and maintenance requirements (and associated costs).1
Marine diesel poses no compatibility risk, but is more expensive than the other fuel options. LNG, another option, is also expensive and comes with the high cost of engine and infrastructure changeover.
Installing gas scrubbers allows vessels to use HSFO versus more expensive lower-percentage fuel. However, retrofitting a vessel with a scrubber requires an investment of $2 million to $10 million,4 and installation can take up to six months.5 Owners of larger bulk ships are being particularly aggressive in their scrubber investments, with between one-quarter and one-third of Capesize expected to have scrubbers installed.7
How Will These Changes Impact the Industry?
While IMO 2020 will help significantly reduce air pollution, these new standards may have an initial negative impact across the industry: most notably the additional cost to the entire container freight industry, which is estimated to be $10 to $12 billion each year.4
Carriers won’t simply eat these extra costs; they will be passed down to shippers and, ultimately, to consumers. Many expect to see these costs start filtering through at the end of Q3 or early Q4 2019 as shipping lines start to use low-sulfur fuels and install scrubbers.
The impact is also not limited to cost, as capacity will temporarily be reduced as vessels are out of commission while scrubbers are installed. Some capacity will even be permanently eliminated due to the additional space scrubbers and LNG tanks will occupy on ships, as well as older vessels being phased out rather than converted to new types of fuel.8
Shippers Need to Plan Ahead
Although the regulation doesn’t come into effect until the first of the year, shippers must prepare now to mitigate the effects on their businesses. Shippers should have conversations with their carriers to understand what fuel pricing and capacity will look like, and plan ahead: booking capacity earlier than usual will be critical to mitigating the potential disruptions.
How is your supply chain preparing for IMO 2020?