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IMO fuel regulations 2020: Shipping costs likely to increase

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The International Maritime Organisation (IMO) is preparing to roll out a landmark set of regulations that will cost carriers at least $15 billion per year. As per IMO fuel regulations 2020, the sulphur content of ships' oil have far-reaching consequences on the environment and the global economy, affecting consumer products, public health, and even politics. The amendment will enter into force as the shipping industry counts down to 01 January 2020, when the limit for sulphur in fuel oil will be reduced to 0.50 per cent m/m outside emission control areas (ECAs), from 3.5 per cent currently. The new limit under IMO's MARPOL treaty will have significant benefits for the environment and human health, though in ECAs, the limit will remain at 0.10 per cent m/m.

The shipping industry is one of the greatest contributors to pollution and carbon emissions on the planet. Maritime shipping consumes 4.40 million barrels of oil per day, accounting for 10 per cent of the oil consumption attributed to the entire transportation sector. Further, international maritime transport is responsible for approximately five per cent of global oil demand.

Most ships use oil that contains 3.50 per cent m/m more sulphur than typical automotive diesel (0-0.5 per cent m/m), causing sulphur oxide emissions that leads to respiratory and lung diseases in communities around shipping ports. The main type of 'bunker' oil for ships is heavy fuel oil, derived as a residue from crude oil distillation. Crude oil contains sulphur which, after combustion in the engine, ends up in ship emissions. Besides causing diseases, sulphur oxides can cause acid rain, which is harmful for crops, forests and aquatic species, and contributes to the acidification of the oceans. A study on the human health impacts of sulphur oxide emissions from ships, submitted to IMO's Marine Environment Protection Committee (MEPC) in 2016 by Finland, estimated that by not reducing the sulphur oxide limit for ships from 2020, air pollution from ships would contribute to more than 570,000 additional premature deaths worldwide between 2020-2025. So, a reduction in the limit for sulphur in fuel oil used onboard ships will have tangible health benefits, particularly for populations living close to ports and major shipping routes.

Fuel prices will play a significant role in the rise of shipping rates, as 60 per cent of a ship's operating cost goes into fuel. This also contributes to higher shipping rates and increased prices for consumer goods. Compliance with the fuel regulations is estimated to increase the cost of port-to-port moves by 10-20 per cent, which will likely be paid for by the end user. To put things in perspective, shipping 40-inch TVs from Shanghai to Los Angeles will cost shippers $0.50 more per unit. Consumers, with no control whatsoever over how the products they buy are transported, will face higher prices that could lead to inflation and increased bank rates. The laws of economics tell us that this will raise prices for carriers filling their ships with low-sulphur fuel. It's possible that the fuel price of a ship may go up by around $200 per tonne, and at the moment it's around $300 per tonne. While the price of ship fuel will not double, it's likely to increase by 50 per cent by 2020.

SERVICE DISRUPTIONS: The new regulations will cause both temporary and permanent effects that will force carriers to reduce their total capacity by seven to eight per cent. Temporarily, capacity will be reduced by four to five per cent as a result of the amount of time vessels will be out of commission while scrubbers are installed, and there is a subsequent increase in the number of blank sailings. Scrubbers cost up to $10 million per ship. This explains the low number of vessels taking this route. Instead, many carriers have decided to scrap older ships rather than retrofitting them. The number of ships sent to the scrap-yard increased around the end of 2018.

In the long term, less than two per cent capacity will be permanently reduced because scrubbers and LNG tanks occupy additional space on the vessel. Vessels over 20 years old will be phased out or 'scrapped'. Slow steaming, where carriers slow down ship speeds to conserve fuel, will become more common. This will further restrict capacity while simultaneously increasing transit times.

PRICE VOLATILITY: Bunker prices are tied to the price of oil, set by the Brent Crude Oil price. The price has been increasing since OPEC began reducing its oil supply in 2017. Because carriers didn't adequately prepare for the surge in bunker demand in 2018, they implemented a cost-recovery programme called emergency bunker surcharges (EBS) and passed the costs onto shippers. From late 2019, a surge in demand for MGO (marine gas oil), which is about 55 per cent more expensive than typical bunker oil, can be expected. If refineries do not have the capacity to meet the demand and if carriers do not adequately prepare, shippers will be at risk of receiving a new set of emergency bunker surcharges that are 15 to 20 per cent higher.

Maersk has determined that IMO 2020 will cause its yearly fuel costs to top $2 billion (approximately $100-175 per TEU, depending on the length of journey). The renowned shipping company announced its plans to shift those increased fuel costs onto its customers before the regulations take effect. Other carriers are following suit. This is creating a ripple effect in the industry and impacting companies that now have to deal with these new fees on top of tariffs.

There are only three ways to meet IMO 2020 standards and compliance with it will be prohibitively expensive. Shippers will be forced to absorb a large proportion of these costs, which stem from the following options for their carriers:

Buy cleaner fuel: Ships can switch from high-sulphur fuel oil (HSFO) to marine gas oil (MGO). This is the easiest and quickest solution. But this will likely lead to an MGO fuel shortage. MGO is approximately 50 per cent more expensive than HSFO.

Install scrubbers: Vessels can continue using HSFO as scrubbers clean their exhaust gas. However, scrubbers are a patchwork solution based on nascent technology and the industry is yet to create a set of standards. They can take four to six weeks to install, are only made by a limited number of manufacturers, and can cost between $5-10 million depending on the size of the vessel.

Capacity crunch and costs aside, the most important question carriers needs to answer is how they will responsibly dispose of the sludge produced by scrubbers.

Liquefied natural gas ships: Ships that run on liquefied natural gas (LNG) will drastically decrease pollutants. However, LNG tanks can also exasperate capacity crunches as they take up almost three per cent of a vessel's TEU slots. Compared to that, scrubbers only occupy at most 0.3 per cent. In the long term, LNG ships take years to build, and retrofitting current vessels to burn LNG is expensive. Should more shipping lines acquire LNG ships, they would face a lack of LNG "gas stations" along major routes and would be at the mercy of fluctuating global oil prices.

Most ships will go with the purchase option and use low-sulphur fuel, and only a handful will use LNG, based on the situation. By the end of the year, up to 2,000 ships may be retrofitted with scrubbers, according to an estimate by IHS Markit - far less than IMO's prediction that 3,800 vessels would have scrubbers. There are nearly 120,000 ships floating around in the world's oceans.

Shippers must plan to absorb increased costs when carriers begin changing their rates as a result of complying with the regulations. Price increases may even be felt prior to January 01, 2020, due to service loops. Service loops are a series of ships that connect a series of ports in a "loop" that can take as long as four months to complete. During this voyage, there are limited locations for refueling. Hence vessels will have to fuel using new, more expensive marine fuel, months before January 2020.

Saving costs wherever possible will be the difference between successfully navigating the new regulations or by succumbing to the new costs of doing business. In addition to planning ahead, those with access to data-driven platforms (such as Flexport customers) should optimise their freight allocation across modes and maximise efficiency to mitigate the economic impact of the regulations.

While IMO 2020 will have negative economic consequences for both carriers and shippers, the environmental consequences of not implementing these regulations could be catastrophic. IMO 2020 is projected to reduce overall sulphur oxide emissions by 85 per cent. This will reduce the occurrence of lightning storms along trade routes, especially in the Indian Ocean and South China Sea. It will also reduce the occurrence of acid rain and diseases affecting human health.

Energy efficiency requirements for vessel design are already mandated and will be "tightened" every five years, with the intention of promoting innovation and technical development. According to the IMO, these requirements will ensure that, as of 2025, new vessels will be 30 per cent more energy-efficient than those built in 2014.

In Bangladesh, the number of marine engines is increasing for land based power generation. These engines will be built to serve as per IMO fuels regulation 2020 by OEM. So, fuel cost will be one of the main concerns while awarding power projects or the tariff for electricity could be reset beside import fuel cost. This regulation needs to be implemented in-line with marine vessels using high sulphur HFO. Immediately, the government should think about IMO fuel regulations and re-set the fuels regulation limit to 0.5 per cent m/m from current 3.5 per cent m/m.

Engr. Md. Shahin Alom is Deputy General Manager of MJL Bangladesh Limited. [email protected]

 

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