The shipping industry looks set to be shaken up by the International Maritime Organization’s decision to cut global bunker sulphur limits to 0.5% in 2020. Most operators will be forced to buy cleaner, more expensive fuels, raising their bills considerably, but that doesn’t mean consumers will endure similarly high prices.
It looks set to be a highly disruptive change for shipping, as each company competes for customers by holding to as small a rise in costs as they can get away with. But a closer look at those costs shows the impact felt by consumers may be limited.
But even with price rises of two or three times higher, consumers are not going to notice a big impact on their wallets in 2020 because of the IMO’s decision.
The tricky part for ship operators will be passing on these increased costs in higher freight rates — without losing customers as they do. In an industry that’s already going through a wave of consolidation, that challenge may be too big for some.
A sense of anxiety is gripping the shipping industry as it looks toward the imposition of more stringent sulfur restrictions on marine fuel on January 1, 2020. But why?
Many shipowners have yet to make up their minds on what fuel to use: will they pay more for diesel fuel? Burn hi-sulfur fuel and invest in expensive scrubbers? How about LNG? Ultimately it will be a mix of approaches, but with most players likely to choose diesel in the short run. As a result, many foresee a spike in diesel prices as the IMO’s 2020 deadline nears.
The global sulphur cap goes a long way to cut harmful emissions but will not be as transformative for the shipping industry nor as disruptive for oil markets as might be excepted.
Industy consolidation and shipping innovation have already unlocked substantial fuel savings that are poorly captured in statistics. With the digitalization set to further reduce the oil intensity of shipping, oil demand growth from the marine sector will likely remain below forecast, which will help blunt the effect of the global cap.
Postponing the rules, as some have advised, would not necessarily give industry more time to prepare. The wait-and-see approach taken by many shipowners is a cautious and rational response to market risks, compounded by potential feedback effects and regulatory uncertainty.
Certain shipping companies, especially the larger ones, are better at understanding their exposure, most however just seek the best price of the day. To overcome this shortfall, almost all rely on traders who, through their global networks, provide access to information on pricing, quality and availability. Less than a handful offer strategic insight, quality control and risk management. The unregulated infrastructure of the marine fuels market has made the need for traders essential. Unfortunately, there are too many traders and only a few deliver true value in what is an ongoing stagnant market where sustained low prices have kept marginal traders in the mix.
On October 27 the International Maritime Organization announced a sharply lower sulfur cap on shipping fuel globally from 2020. But what are the implications for shipping lines, refineries and crude producers? Ned Molloy, managing editor for European fuel oil, reports.