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With IMO 2020 looming, shippers should be keeping a close eye on how carriers, shippers, and refiners are responding to the new 0.5% global sulphur cap.
With the International Maritime Organization’s new 0.5% mass by mass (m/m) global sulphur cap on fuel content (down from a current 3.5%) on track for a January 1, 2020 enforcement date, shipowners and operators are now figuring out how the best way to comply with these new IMO regulations.
As IMO’s response to heightening environmental concerns—contributed in part by harmful emissions from ships—the new sulphur cap has also pushed oil refiners to consider producing more low-sulphur fuel in order to meet possibly higher demand, as owners, operators, and refiners all “anticipate an unprecedented change in the marine fuels supply landscape,” Seatrade Maritime News reports.
With many ships already complying with the IMO’s 0.1% sulphur cap in designated Emission Control Areas (ECAs), those operating outside of those areas will now have to work harder to reduce the levels of sulphur oxide that they produce. According to the IMO, the new regulation will “significantly reduce the amount of sulphur oxide emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”
Measuring IMO 2020’s Impacts
Under the new sulphur limit, any “fuel on board” that is used in main and auxiliary engines and boilers must have a sulphur content of no more than 0.5 percent. According to the IMO, ships can meet the requirement by using low-sulphur compliant fuel oil; by using fuels like methanol or gas (when ignited, gas produces negligible sulphur oxide emissions); or by retrofitting ships with systems that “clean” the emissions before they are released into the atmosphere, so-called scrubbers.
Trond Prestroenning, Executive Vice President, Ocean Freight Americas at DB Schenker, says IMO 2020 will be one of the biggest topics of interest to the ocean shipping community this year, mainly because the industry has one of the highest oil consumption rates among all transportation modes.
“The IMO is imposing these low-sulphur caps, which are clearly good for the environment, the globe, and everyone on it,” says Prestroenning. “But as with any new regulation, the new rules also pose some new challenges for the ocean shipping industry to overcome—and without doubt – some cost impact for shippers.”
Citing a potential $60 billion global cost impact on the ocean industry as a result of IMO 2020, Prestroenning says those additional costs will likely be absorbed by the shipowners and cargo owners/customers. “They’ll be looking for someone to foot the bill on all of the changes that have to be made to their vessels, and for the higher-cost fuels that they’ll have to start using,” says Prestroenning. Whether oil producers will have enough compliant fuel in reserves once the January 1, 2020 deadline comes is another issue that could impact shippers. In fact, Prestroenning says suppliers are already signaling that they probably won’t be able to meet demand once the new caps are in place.
“The landscape is pretty flustered right now as carriers scramble to put compliant strategies together and to make sure their operations keep running smoothly, even with these variables hanging over their heads,” says Prestroenning, who tells shippers to keep close tabs on the market shifts and to work closely with their freight forwarders and logistics providers. DB Schenker, for example, is looking to roll out its IMO 2020 strategy in January 2019.
“Our strategy is going to depend on what the ocean carriers and shipowners themselves are going to do (i.e., to offset related surcharges, which will be instituted per container or TEU), and that’s not immediately clear yet,” says Prestroenning. “Once those strategies are in place, we’ll be able to put our own plan in place for helping our customers to navigate thru the impacts from IMO 2020.” We are hoping for clear and simple models from the ocean carriers to avoid complex administrative processes to manage this.”
Keeping an Eye on the Ball
For the year ahead, Prestroenning expects to see some constraints on the demand side, namely in terms of ocean container space. “With all of the new alliances reshuffling capacity, and in light of IMO 2020, we could be looking at a fairly unstable market in 2019,” he predicts, “which could lead to some price or rate volatility.”
Other trends to watch include the U.S. truck driver shortage (and the related capacity issues) and the trade/tariff wars, both of which directly impact ocean shippers’ ability to get their goods to their destinations on time and affordably. To offset any negative impacts of these capacity limitations or rate increases, Prestroenning says shippers should align themselves with large, global freight forwarders/NVOs such as DB Schenker that have the bandwidth to offer services across all carriers/alliances, and with extensive trucker networks.
“With everything that’s taking place in and around the ocean environment right now, we’re in a pretty fluid situation that’s not always predictable,” says Prestroenning. “As we move into 2019, shippers should keep close to the experts in the industry, align with reliable partners, and try to keep their fingers on the pulse of what’s going on. That way, there will be fewer surprises and more successes.”
