Pain for shippers as IMO 2020 sulphur cap related bunker surcharges set to kick in

In one of my articles, I shared news that the International Maritime Organization (IMO) has been working to reduce the harmful impacts of shipping on the environment..

As part of this initiative, the IMO discussed regulations for the Prevention of Air Pollution from Ships (Annex VI) which seeks 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) and 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..

In order to facilitate smooth implementation of the global 2020 sulphur cap across the industry and in order to ensure that everyone is prepared, Maritime Authorities at the Paris and the Tokyo Memoranda of Understanding (MoU) on Port State Control will be carrying out a joint information campaign from the 1 January to 31 December 2019..

As part of this campaign, the authorities  will issue a letter of warning as below on the sulphur content of marine fuels during inspections done on ships from the 1st of Jan 2019..

[pdf-embedder url=”https://www.shippingandfreightresource.com/wp-content/uploads/2019/01/Letter-of-Warning-Sulphur-Content-Paris-MoU-on-PSC.pdf” title=”Letter of Warning Sulphur Content – Paris MoU on PSC”]

The campaign is aimed at increasing awareness among the crew and ship owners and encourage compliance with Regulation 14 Sulphur Oxides (SOx) and Particulate Matter of MARPOL Annex VI..

Naturally such compliance requirements bring along with it additional costs and uncertainty in terms of fuel costs for shipping and shipping lines..

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)..

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 need to invest in scrubbers etc..

As per previous reports, 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 in late 2018 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..

Other lines like MSC, CMA-CGM, ONE, OOCL and APL also 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..

These new bunker surcharges will kick in as of Week 1 of 2019..

As per Splash 24/7, Freightos is predicting that this will result in freight rate increases of between 5 to 10%, depending on the tradelane..

These increases may, however, have come at an inopportune moment as the bunker costs seem to have decreased by around 20% since the last quarter of 2018 as can be seen below..

The implementation of the bunker surcharges at a time when the bunker prices are going down may be seen as lending credence to some of the statements from the trade that these charges are nothing but blatant profiteering by shipping lines..

2019 certainly is off to an interesting start.. 🙂 What is your opinion on this based on which side of the fence you are on..