How much will 2020 cost?

There have been a number of estimates of the magnitude of the cost to the shipping community of implementing the global 0.50% sulphur cap in 2020.

Recently, Wood Mackenzie grabbed the headlines by saying global bunker fuel costs could rise by up $60 billion annually from 2020, in a full compliance scenario, when the International Maritime Organization (IMO) regulation kicks in. The underlying assumption for this headline figure was based on the majority of the world fleet switching from high sulphur fuel oil (HSFO) to marine gas oil (MGO). “A combination of higher crude prices and tight availability of MGO could take the price of MGO up to almost four times that of fuel oil in 2016, and eventually cost the entire industry additional US$60 billion annually,” Wood Mackenzie said in a press release about the findings of a study undertaken by the research and consultancy firm.

 

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Not Just A Shipping Problem

There are quite few options available to shipowners to reach compliance with the new sulfur cap. All of those have two things in common – high costs and uncertainty. Whichever way shipping companies decide to go, each one of them will have to make long-term expensive bets in an already troubled market. These decisions, like ripples in the water will affect their business strategies and investment decisions, like sale and purchase of tonnage for years to come.

In the meantime, what seems inevitable is the upcoming dramatic increase in freight rates across all the shipping sectors. Bunker costs may take up 70 – 80 % of total voyage expenses. So, as their costs rise, shipowners will do the most natural thing – try to pass those on to their customers. Of course, in the currently weak freight market shipowners do not have enough clout to make clients take up the whole bill, but the lion’s share will still have their to be absorbed by those who pay for the transportation of goods. And numbers here can be quite substantial.

If we take an example from the dry bulk market, a delivery of 50,000 mt of sugar on a modern Supramax vessel from Brazil to North China, using MGO instead of the standard 380 CST fuel oil may cost around $225,000 extra in bunker costs, considering the current bunker price spread in the port of Singapore. As this spread by some estimates could get two to four times wider in 2020, the added expenses may easily go over half a million dollars. This is just for one voyage.

If we assume that China imports 2.5 million mt of Sugar from Brazil and does it all on Supramax vessels, the total extra bunker costs on just this single arbitrage may easily reach $25 million. A sum that would have to be absorbed by higher freight rates.

While this is an extra pain for shipowners, considering the weakness in the freight market, it can be both a problem and a blessing for traders. Depending on which side of the fence they are sitting on. High freight is an issue for long-haul suppliers as it makes their CIF price less competitive. For example, it can make Brazilian sugar less attractive for Chinese buyers. China might instead pay more attention to closer suppliers like Australia or Guatemala and those countries might find higher bunker prices to be a blessing.

Such examples are easily found in pretty much every commodity market across every shipping sector. So at the end of the day, one thing is for certain: as shipping tries to adjust to the new sulfur cap, it will not be an isolated battle. Anyone with the skin in the game of seaborne trade will feel this one way or another.

 

Alex Younevitch, managing editor, freight markets, S&P Global Platts

Getting ready for the new reality

1 January 2020. That’s the date set by the International Maritime Organisation (IMO) to fully implement the global sulphur limit of 0.50% m/m (mass/mass) in 2020. And it’s around the corner.

Read the literature: The prescribed reduction in the sulphur content of fuel oil used by ships is a significant cut from the 3.5% m/m global limit currently in place and it demonstrates the IMO’s clear commitment to ensuring shipping meets its environmental obligations. But what is the reality for you if you are concerned about your fuel quality, cost and availability and want to keep within the new proposed guidelines?

It’s a fact that “16 of the largest ships really emit as much SOx as 800 million cars” and then you read that “pollution from the world’s 90,000 cargo ships leads to 60,000 deaths a year and costs up to $330bn per year in lung and heart disease related health care costs.” That was also from the Guardian newspaper. Capping the sulphur content in fuels is an existentially necessary measure and it is little wonder we are all looking for solutions to cut emissions.

Many of those involved in the maritime industry talk about solutions involving high-tech hardware. Exhaust gas scrubbers, for instance, are top of mind. Even if regulators and environmentalists often suggest that the only way to better efficiency and lower emissions is high-tech hardware, these technologies represent significant capex and costs must be taken into account for things to change. I appreciate we are in the business of fuel treatment solutions but it doesn’t stop me from saying with real conviction that there is a real benefit to be had from looking at what goes into the engine, not just at the engine itself and the exhaust system. Not that we don’t see hardware as an effective solution, it’s just that achieving the goal of better efficiency and lower emissions will be easier and more cost-effective if we use a mix of solutions. Especially if the results are there. It’s synergies we as an industry should be looking at.

Look at the facts, culled from a thousand reports, to understand that shipping contributions to European coastal air quality degradation are real and that maritime transport is a significant and increasing source of air pollutants. “Around 15% of global anthropogenic NOx and 5-8% of global SOx emissions are attributable to oceangoing ships (Eyring et al., 2005; Corbett et al., 2007) and nearly 70% of ship emissions are estimated to occur within 400 km of land,” is just a more scientific way of saying that business as usual is over and something has to be done.

The SECA regulation that went into effect on 1 January 2015 was a major step towards addressing the health and environmental issues caused by sulphur emissions. And more SECA zones are planned. The regulation also created new challenges and costs for the industry, from increased operational risks as a result of having to switch over between HFO and LSGO to variations in fuel quality and related incompatibility issues. One corollary was a rise in loss of power incidents registered by Coast Guards.

If the aftermath of 2015 is any indication, the industry is bound to face more risk and uncertainty as regulators plot a course into the new 2020 reality. The rising demand for low sulphur fuels will come at quite a high cost in economic and financial terms: Refining methods for ultra-low sulphur fuels for shipping will up prices by about 30% vs HFO. As the market now becomes even more fragmented, we will see even wider fluctuations in fuel quality and availability. And along with that, the risk of problems related to fuel incompatibility is likely to further increase as well. There are other aspects that can’t be neglected: Desulphurisation compromises the fuel’s inherent lubricity, leading to increased component wear and potential damage, and the natural sulphur content was also a deterrent to the growth of microorganisms.

As new regulations raise concerns about performance and compatibility, and open the door for high-tech solutions, it’s worthwhile to keep in mind that addressing new constraints while cutting opex and emissions isn’t just about increasing capex in hardware.

Aderco is in the business of preventing these risks and have successfully been doing so since 1981. With proven fuel treatment solutions that address sludge, water, catfines, bacterial growth and other issues while ensuring a cleaner, more efficient burn that protects engines, minimises emissions and saves money.