More shipping lines join the 2020 sulphur cap fuel surcharge bandwagon….
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) collectively known as bunker fuel..
These fuels have a high content of sulphur which is quite harmful to the environment..
The IMO has been working to reduce harmful impacts of shipping on the environment since the 1960s..
The regulations for the Prevention of Air Pollution from Ships (Annex VI) seek to control airborne emissions from ships (sulphur oxides (SOx), nitrogen oxides (NOx), ozone depleting substances (ODS), volatile organic compounds (VOC) and shipboard incineration) and their contribution to local and global air pollution, human health issues and environmental problems..
The current global limit for sulphur content of ships’ fuel oil is 3.50% m/m (mass by mass)..
The regulations to reduce sulphur oxide emissions has introduced a new global limit for sulphur content of ships and as from 1st of January 2020 the new global limit on the sulphur content will be 0.50% m/m..
IMO has advised several methods through which ships can meet lower sulphur emission standards..
Ships can meet the requirement by using low-sulphur compliant fuel oil. An increasing number of ships are also using gas as a fuel as when ignited it leads to negligible sulphur oxide emissions.
This has been recognised in the development by IMO of the International Code for Ships using Gases and other Low Flashpoint Fuels (the IGF Code), which was adopted in 2015. Another alternative fuel is methanol which is being used on some short sea services.
Ships may also meet the SOx emission requirements by using approved equivalent methods, such as exhaust gas cleaning systems or “scrubbers”, which “clean” the emissions before they are released into the atmosphere. In this case, the equivalent arrangement must be approved by the ship’s Administration (the flag State).
Naturally such compliance requirements brings along with it additional costs and uncertainty in terms of fuel costs for shipping and shipping lines..
While BAF surcharge is designed to recover increases in bunker related costs these compliance costs have not been catered for by any of the shipping lines..
According to industry estimates, more than 90% of the global vessel fleet will be relying on compliant fuels when the sulphur rules step into force on 1 January 2020 and lines will ne
ed to invest in scrubbers etc..
Maersk Line expects its extra fuel and compliance costs to exceed USD 2 billion based on expected differences in price between the current 3.5% bunker fuel and the compliant 0.5%..
In order to cover these additional costs, Maersk Line announced that they will change their fuel adjustment surcharge ahead of the 2020 sulphur cap..
The global container shipping industry could spend up to USD 15 billion in trying to be compliant with above requirements..
Now other lines like MSC, CMA-CGM, ONE, OOCL and APL have jumped on the bandwagon in announcing that these costs for compliance will have to be passed on to customers/trade through the implementation of new or adjustment to existing fuel surcharges, which may vary based on the trade lanes..
Obviously the trade is not happy about these charges with some bodies like BIFA even calling it blatant profiteering by shipping lines..
But do shipping lines have any other option as these regulations are aimed at improving the environment and reducing its impact for all, so it cannot be just the line’s burden alone to bear..
The Goodshipping program had an innovative idea to use Vegetable Oil to power ships..
Does anyone reading this article have any other alternate idea to how the shipping lines can achieve compliance but without charging these extras..?? Do share..
This is great. Until now i didnt know vessel uses fossil fuel (bunker oil).
thank you for this great article
The disagreement between shipping lines and shippers exists as shipping lines mix two different issues together (as has been done for many years) – ‘regulatory compliance’ and ‘ownership of risks’.
For the 1-1-2020 deadline there are limited options available for shipping lines to be compliant. Low sulphur fuel and scrubbers seems to be only realistic options. In the longer term there are options with nanotechnology and alternative fuels, e.g. vegetable oil, hydrogen, etc.
The shipper outrage is caused because shipping lines unilaterally want to pass on the costs to shippers and thus ‘take the easy way out’ instead of addressing their inherent risks of being in the shipping line business, e.g. by hedging fuel, etc.
At the end of the day supply/demand will decide total price of the transport. If supply/demand balance remains unchanged then an effect of increasing fuel surcharge will merely be eliminated by decreases in freight rates – and with an even more strained relationship between shipping lines and shippers.
Thanks for your comment Hans.. Let me play the devil’s advocate and ask you this..
In a lot of sea routes, lines are already including bunker costs in the freight rates and if you look at those freight rates, they are quite low.. So shouldn’t they be justified in charging for fuel separately when measures to protect the environment are implemented..??
Do you agree then that cost of fuel should be included in the cost of sea freight like it is done in road freight as well where rates go up depending on the route, distance and additional fuel surcharges levied when there are abnormal increases..??
Hedging of fuel can only provide some relief in the pricing of fuel, but cannot assist with the changes that are required from 2020.. Shippers can also maybe suggest workable solutions..