With the International Maritime Organization’s (IMO’s) new 0.5% mass by mass (m/m) global sulfur cap on fuel content (down from a current 3.5%) on track for a Jan. 1, 2020 enforcement date, electronics buyers around the world are wondering just how this new regulation will impact their supply chains.
The main type of “bunker” oil for ships is heavy fuel oil, derived as a residue from crude oil distillation. Crude oil contains sulfur which, following combustion in the engine, ends up in ship emissions. Sulphur oxides (SOx) are known to be harmful to human health, causing respiratory symptoms and lung disease, the IMO states.
In the atmosphere, SOx can lead to acid rain, which can harm crops, forests, and aquatic species, and contributes to the acidification of the oceans. “Limiting SOx emissions from ships will improve air quality and protects the environment,” the IMO says on its website.
Under the new sulfur limit, any “fuel on board” that is used in main and auxiliary engines and boilers must have a sulfur content of no more than 0.5%. According to the IMO, ships can meet the requirement by using low-sulfur compliant fuel oil; by using fuels like methanol or gas (when ignited, gas produces negligible sulfur oxide emissions); or by retrofitting ships with systems that “clean” the emissions before they are released into the atmosphere, so-called scrubbers.
According to the IMO, the new regulation will significantly reduce the amount of sulfur oxides emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.
A High Level of Uncertainty
Right now, shipowners and operators around the world are figuring out the best way to comply with the new IMO 2020 regulations. According to Kuehne + Nagel, the new rules have created “a high level of uncertainty about availability of petroleum products and pricing.” It will impact vessel operators, refineries, and global oil markets. So far, ocean carriers have come up with the following options for complying with the new low-sulfur rules:
- Use scrubbers (emission cleaning technology) to remove pollutants from the ship’s exhaust, which allows them to continue using higher-sulphur fuels. However, the process of installing scrubbers is limited and expensive due to space and capacity constraints and will increase operating costs.
- Switch to non-petroleum-based fuels such as liquefied natural gas (LNG) for newer vessels with appropriate specifications. However, the infrastructure to support the use of LNG is currently limited in scope and availability. “Experts predict that by 2020 approximately 250 to 500 vessels, or a maximum of 10% of the global container fleet, will either be equipped with pollution cleaning technology or will be able to burn LNG,” Kuehne + Nagel reports.
- Switch to a Very Low Sulphur Fuel (VLSF) that complies with the new rules (most likely choice). However, the cost, widespread availability, and specifications of a new fuel for use in marine engines are still uncertain. “The petroleum industry needs to adapt refineries and supply chains and is likely to pass these costs on to the market,” the company says.
Obviously, any or all of the above efforts will require significant investments in time and money, the latter of which may be passed along to shippers as we move closer to the January 2020 compliance deadline. According to Kuehne + Nagel’s calculations, the expected increase in costs will have a significant impact on the overall prices of container transportation and on freight rates.
“While the implementation date for IMO 2020 is Jan. 1, 2020, we anticipate freight rates to increase as early as the end of the third quarter of 2019,” it points out. “Therefore, long-term agreements for both full and part load containers will include a price adjustment method also known as Bunker Adjustment Factor (the ‘floating’ part of sea freight charges which represents additions due to oil prices).”
As the ocean shipping industry prepares for the new regulations, buyers should also be prepared for possible price volatility and service disruptions with their seagoing freight. “Compliance will cause both temporary and permanent effects that will force carriers to reduce their total capacity by 7 to 8%,” Flexport International warns. “Temporarily, capacity will be reduced by 4 to 5 as a result of the amount of time vessels will be out of commission while scrubbers are installed, and a subsequent increase in the number of blank sailings.”