IMO2020 is getting serious commercially..
As everyone may have read, as of January 2020, all ships are required to use fuel with a sulphur content of 0.5% or less on all of the world’s oceans..
It is estimated that 3.9 million barrels a day is used on ships traversing the oceans..
The ship owners have a few options to ensure compliance and meet lower sulphur emission standards, each with some pros and cons..
|Low Sulphur Fuel||Most environmentally friendly solution||High cost, low availability|
|LNG||Negligible sulphur oxide emissions||High infrastructure costs; too expensive to convert older ships|
|Scrubbers||Cleans emissions before they are released into the atmosphere||Substantial investment required; ships must dry dock to be retrofitted; lines need to comply with wash water disposal regulations in various countries|
But various lines have been using various methods as listed above and only time will tell which of the options are popular..
Maersk Line recently secured the usage of 5-10% of their low sulphur fuel demand through a deal between Maersk Oil Trading and Koole Terminals in Rotterdam..
Jörg Erdmann, Senior Director Sustainability Management of Hapag Lloyd, said “We are prepared, as our fleet will operate using compliant fuels by 1 January 2020. In addition, we are testing other options, and Hapag-Lloyd will be the first shipping company to convert a large container ship to climate-friendly liquefied natural gas”..”
Containerships, a subsidiary of CMA CGM Group took delivery of its first container ship powered by liquefied natural gas (LNG) in 2018 and CMA CGM itself will receive its nine 22,000-TEU container ships powered by LNG from 2020..
Costs for compliance
Naturally, such compliance requirements bring along with it additional costs and uncertainty in terms of fuel costs for shipping lines and customers..
Carriers will be exposed to huge costs in preparing the ships to meet the required standards, some of which costs are expected to be incurred as part of the preparations for IMO2020..
MSC estimates that the cost of the various changes that will need to be made to their fleet and its fuel supply is in excess of two billion dollars (USD) per year while Maersk Line expects its extra fuel and compliance costs to exceed USD 2 billion..
Hapag Lloyd’s CEO mentioned that they are expecting their low sulfur fuel costs to be around USD75-100 million during the 4th Quarter of 2019 in order to be ready for IMO2020 implementation date of Jan 1, 2020..
Many shipping lines like CMA-CGM, ONE, OOCL and APL had announced that the costs for compliance will have to be passed on to customers/trade and this will be done through the implementation of new or adjustment to existing fuel surcharges, which may vary based on the trade lanes..
What will be the impact of IMO2020 on cargo owners..??
Well, the shipping lines have made their intentions clear by implementing additional surcharges to cover for these extra costs that they will be incurring to operate their ships on cleaner fuel..
They have categorically announced that they are not going to pay for these costs alone as environmental protection is everyone’s baby..
So naturally either the seller or buyer will have to foot the bill for these additional surcharges..
These type of surcharges will form an interesting part of price negotiations in a sales contract between a seller and buyer as these are new charges and may not have been included thus far in the negotiations..
How is the MFR calculated..??
Each line calculates these surcharges in different ways as there are several factors such as services, trade lanes, the efficiency of ships on these trade lanes, the weight distribution on the head haul and backhaul, consumption per day, port stays etc..
For example, Hapag Lloyd announced the introduction of a Marine Fuel Recovery (MFR) mechanism which is to be calculated as below :
MFR (per TEU) = Fuel Price (per ton) x Fuel Consumption (per ton)/Carrier TEU
Based on this calculation, the Marine Fuel Recovery surcharge could vary between per trade from a low of USD124/TEU to a high of USD368/TEU depending on trade lane and different fuel price bands per tonne..
If you are a shipper that ships around 10,000 containers a year on a specific trade lane, you could end up paying USD1,240,000 on the low end to USD3,680,000 on the high end if you ship only 20’s or USD2,480,000 on the low end to USD7,360,000 on the high end if you ship only 40’s only for this surcharge..!!
Is this how it is going to work..?? Only time may tell..
Many small volume shippers are nervous that they will end up paying the bulk of these new surcharges compared to the larger volume shippers because they don’t have the volumes to demand a separate MFR formula and may be forced to accept the surcharges imposed by the carriers..
One one hand while the cost impact of IMO2020 could be a deal breaker for many, it could be an opportunity for many others to develop bio fuels for use in the ships..
We may not yet be able to calculate the true cost of IMO2020 for consumers around the world but what we do know that this has been implemented to combat climate change in whichever way possible although maritime shipping has one of the lowest carbon emissions compared to other modes of transport..