From 1 January 2020, the limit for sulphur in fuel oil used on board ships operating outside designated emission control areas will be reduced to 0.5% m/m (mass by mass). This will significantly reduce the amount of sulphur oxides emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.
Whereas today ships can use fuel with up to 3.5% sulphur content (outside Emission Control Areas), the cost of compliance with the new regulation will be significant, so the cost of shipping will increase.
More than 70,000 ships will be affected by the regulation. Stricter limits on sulphur (SOx) emissions are already in place in Emission Control Areas (ECAs) in Europe and the Americas, and new control areas are being established in ports and coastal areas in China.
But what does IMO 2020 mean for shippers? How will this affect me and my freight?
The regulations will affect shippers, shipping costs and end consumers.
Shippers need to be aware, plan and prepare for price increases in 2020. Processes will not change, but Industry sources believe that the price of ship fuel is likely to go up by 50%. This could increase the cost of port-to-port sea freight by 10-20%.
Port-to-port sea freight costs are passed onto the party that is paying for the sea freight, so whether this is the importer or exporter depends on the Inco Terms for the goods being sold. For example:
If exporters ship on CIF/CFR terms, they are already covering the costs of sea freight, so the exporter’s costs will increase.
If the exporter is selling on FOB terms, the importer is paying for the costs of sea freight, so the importer’s costs will increase.
In both cases, the landed cost of products will increase.
It is important that both importers and exporters monitor the increases to understand the actual cost of their products. Therefore decide how much of the increased costs they are willing to absorb, and how much will be passed on to customers and end consumers.
Ships have always been the most sustainable way to transport commodities and goods. And ships are increasingly becoming even more energy efficient.
These are the largest machines on the planet and the world’s largest diesel engines can be found on cargo ships. These engines can be as tall as a four-storey house, and as wide as three London buses. The largest marine diesel engines have more than 100,000 horsepower (in comparison, a mid-sized car may have up to 300 horsepower). The largest container ships can carry more than 20,000 containers and the biggest bulk carriers can carry more than 300,000 tons of commodities, like iron ore.
Studies have shown that ships are by far the most energy-efficient form of transportation, compared with other modes such as air, road and even rail freight, and the IMO regulations on energy efficiency support the demand for greener and cleaner shipping. A ship which is more energy efficient burns less fuel so emits less air pollution.
For compliance with the 2020 Sulphur deadline, there are three choices available to ship operators:
1. Purchase cleaner, low-sulphur fuel
Shipping lines can change the fuel they use to run their engines. They can switch from using traditional bunker fuels (High-Sulphur Fuel Oils, HSFO), to using Marine Gas Oils (MGO). But these new MGOs can cost up to 50% more than the HSFO oils already being used.
2. Install Exhaust Gas Cleaning Systems, known as “Scrubbers”
Shipping lines can still choose to run their vessels on HSFO fuels. To meet the low sulphur regulations of 0.5% m/m, “scrubbers” can be installed to reduce emissions. These scrubbers are designed to remove Sulphur Oxides from the ship’s engine and boiler exhaust gases.
Installing scrubbers can cost between $5-$10 million, take 6+ weeks to install and are only made by a limited number of manufacturers around the world.
Due to this, some older ships have already started to be scrapped, with more ships likely to go to the shipping graveyard towards the end of 2019.
3. Switch to Liquefied Natural Gas (LNG)
Most ships will switch to using low sulphur fuel such as LNG to meet regulations. However, switching to LNG fuels will cause the industry a few issues.
Ships with LNG tanks fitted will take up more physical space, these new tanks could take up almost 3% of a vessel’s TEU slots. As a result, this will reduce the amount of shipping containers that can be carried.
Also, due to the likely drastic increase in demand for LNG fuels, it has been reported that the price of LNG may increase as much as 50%.
This could impact transit times.
The increased costs of fuel could also increase vessel transit times. Shipping lines may increase the practice of “slow steaming”, where ships sail at slower speeds to conserve fuel. This will further restrict capacity and also increase transit times.
How can shippers counteract IMO2020?
There will be no avoiding the price increases in 2020. But shippers should monitor and understand the situation. Especially in the lead up to Chinese New Year – which falls earlier next year on Saturday 25th January 2020. More advice on how to prepare for Chinese New Year here
As freight forwarders we will be negotiating with our preferred shipping lines to hold competitive rates for our customers throughout 2020.
For shipping quotes and further information please speak to David Stansfield our Sea Freight Manager +44 (0) 1622 237979 firstname.lastname@example.org