- Ships prohibited from using fuels containing more than 0.5% sulphur unless they are already fitted with scrubbers or equipped for alternative fuels such as LNG.
- Carriers are bearing the brunt of their wrath because of the straightforward business relationship between the two along the supply chain.
- A surprisingly large proportion (33%) of respondents expressed poor awareness and understanding of the new regulation.
- IMO estimated that over 570,000 premature deaths can be prevented between 2020 and 2025 by introducing new shipping regulations.
According to an article published in Seatrade-Maritime News, with the implementation of International Maritime Organization Low Sulphur Regulation (or IMO 2020), concerns keep on growing amid recently announced bunker adjustment factors by carriers and the apparently far-from-enough low-sulphur output from global oil refiners.
Strict bunker standards
With the stricter marine bunker standards kicking in on the very first day of the New Year, ships are prohibited from using fuels containing more than 0.5% sulphur unless they are already fitted with scrubbers or equipped for alternative fuels such as LNG. Any failure to comply with the global regulation results in fines and vessels being impounded.
Finger pointing never ceased for a second among shippers over who should take the blame for the extra cost IMO2020 would inflict on them, and unfortunately, to some extent logically, carriers have to bear the brunt of their wrath because of the straightforward business relationship between the two along the supply chain.
Poor awareness and understanding of the new regulation
IMO finalized its decision to lower sulphur cap back in 2016. The long due conversation between carriers and shippers should have taken place in the past few years, but the fact is some beneficial cargo owners didn’t even know the upcoming regulation until carriers announced their new bunker surcharge structures in late 2018. According to a survey by Drewry in 2H 2018, a surprisingly large proportion (33%) of respondents expressed poor awareness and understanding of the new regulation, while only 14% of them had conducted some impact assessment.
The slow responsiveness to IMO 2020 in compliant fuel output and distribution
Designed for human health
The most obvious would be a misconception of the reason why IMO 2020 was introduced in the very first place when many in the shipping industry, even till now, believe IMO 2020 aims to cut greenhouse gas emission. But the truth is IMO 2020, targeting sulfur only, has nothing to do with global warming and climate change. In fact, the new regulation is designed for human health – a rising percentage of sulfur dioxides in air increases the incidence of cardiovascular diseases and lung cancer – a study on the impact of sulfur dioxides published in 2016 and cited by the IMO estimated that over 570,000 premature deaths can be prevented between 2020 and 2025 by introducing new shipping regulations.
Besides, when shippers point their fingers and levy most criticism on carriers for slow transition to cleaner marine bunker, it should also be kept in mind that when the uncertainty around the availability of new regulation-compliant fuels is going to take its toll on the industry, did oil companies and refiners act fast to ramp up compliant fuel output and distribution? Yes, they did, but not until recently. That’s why oil giants including Royal Dutch Shell and BP have announced low sulfur fuel production to meet market needs for compliant-fuel supplies.
Re-planning of sailing routes
While ships can find proper supplies at major bunkering ports in Singapore, UAE (Fujairah) and Europe (Rotterdam), what could happen when carriers have to re-plan their sailing routes for competent bunkering ports is totally uncharted water, especially when they are much sparsely scattered.
With the huge question mark hanging over the production/availability of low-sulphur fuel, and the industry-wise rush to make the switch, the price difference between 0.5% and 3.5% sulphur fuels widened significantly since early 3Q according to S&P Platts.
Global oil companies have started to upgrade oil processing units to increase compliant fuel production, but it is estimated that the shipping industry consumes 4m barrels of bunker fuels per day, while global VLSF output can merely cover 60% of market needs. With supply falling far short, the price spread is expected to soar between 0.5 and 3.5% sulphur fuels, thus any future freight rate increase should never be solely blamed on carriers since they are not the ones producing and distributing the fuel.
Share extra burden together or ace another looming Hanjin drama
Industrial analysts estimate the liner industry is likely to be one of those hit the hardest——an extra bunker cost of $10bn on carriers’ balance sheets is by no means a burden that can be absorbed among liner industry.
One of the major risks identified is the impact of IMO2020 on container ship supply which could see significant fleet downsizing as the consequence of carriers not being able to recover bunker cost to some fair point.
The aforementioned claim seems to be bluffing, but some simple mathematics suffice to tell the whole story: the price spread between low-sulfur, IMO compliant and noncompliant fuels averages at $200 per ton which is a mainstream idea shared by the market, and let’s take Hapag Lloyd as an example whose annual report specifies full year bunker consumption and breaks it down to high and low sulfur numbers, to shed light on what IMO2020 has in store for a liner company.
Astonishing increase in bunker cost
For the year of 2018 Hapag Lloyd consumed 3.8m tons of high sulphur fuel and 562 thousand tons of low sulfur fuel, so it would be $770m worth of extra bunker cost if the carrier replaces all non-compliant fuels to meet IMO2020 requirements, while its total bunker cost amounted to $2bn (18% of its total cost) in 2018. That means an astonishing 39% increase to its full year bunker cost, and for an industry with greatly narrowing profit margins, the number can be devastating to any industry players who have been struggling not to dip into the red for years.
Any failed attempt to recover bunker cost by the carriers will inevitably lead to the compromise in container ship capacity and therefore in customer experience：
- Slow-steaming：limited options for time-sensitive goods; shippers might have to pay higher premiums for air freight services
- Blank sailing: inconsistence and disruption to liner services.
Off-hiring: a direct cut to market supply - Inclusion of smaller port calls to major services: increased transit time and higher risk of pending
- Frequent detour for bunker supply: liner companies are forced to detour for competent bunkering hubs, lowering transit efficiency while further increasing freight rates
No doubt market supply is highly relevant to customer experience and service quality. Prolonged exposure to low freight rate and financial loss acts as lethal weapons against any container lines and the aftershock and rippling effect of Hanjin collapse nowadays can still send a chill down a shipper’s spine. Instead of liners alone, the extra burden ought to be taken by the entire shipping industry to avoid another Hanjin drama looming in the dark.
Stricter green shipping policies on the way
To be well aligned with IMO’s 2050 goal to slash greenhouse gas emission by at least 50% compared with 2008, the shipping industry is going to be faced with tougher environmental policies and thus higher compliance cost. There is no once-and-for-all solution to green shipping requirements as increasing focus mounts on environmental protection and human health. One seems fit today may not seem so tomorrow.
Scrubbers are a good example in this case with its popularity on the rise as carriers vigorously pursue scrubber installation. But there is no guarantee that scrubber will not be targeted next by IMO in the foreseeable future. Ten environmental groups this year sent a letter to IMO to call for reevaluation of scrubbers as alternative compliance tools for 2020 fuel standards, citing evidence in US federal case against Carnival Corporation to prove its incompetence.
Greener shipping
The example is not meant to pour cold water on carriers seeking scrubber installation, but to pose as a wake-up call for the shipping industry as a whole that, with “greener” shipping policies on its way, all industry shareholders should take a role instead of putting on an indifferent look and pointing fingers of blame.
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Source: Seatrade-MaritimeNews
