IMO 2020 raises fears and 'what ifs' as uncertainties abound

FEARS mount in the shipping industry as bunker adjustment factors are introduced by major shipping lines along with the insufficient output of very low sulphur marine fuel from refinineries, says a Cosco Shipping press release

28 December 2019 - 05:48
FEARS mount in the shipping industry as bunker adjustment factors are introduced by major shipping lines along with the insufficient output of very low sulphur marine fuel from refinineries, says a Cosco Shipping press release.

Come New Year's Day, under the UN's International Maritime Organisation's (IMO) low sulphur rule, ships will be prohibited from using fuels containing more than 0.5 per cent sulphur unless they have been fitted with scrubbers or equipped for alternative fuels such as liquefied natural gas (LNG).

Failure to comply with the global regulation results in fines and vessels being impounded.

Yet, discord is rife among shippers over who should take bear the extra cost of compliance with IMO 2020.

The new regulation is designed protect human health given that the rising concentration of sulphur dioxide in the air increases the incidence of cardiovascular diseases and lung cancer.

Oil companies and refiners are now ramping up output of compliant fuel, including Royal Dutch Shell and BP who have announced low sulphur fuel production to meet market needs for compliant-fuel supplies.

While ships can find proper supplies at major bunkering ports in Singapore, UAE and Europe Rotterdam, carriers may have to re-plan their sailing routes to locate competent bunkering ports that are sparsely scattered at present.

With a question mark hanging over the production and availability of low sulphur fuel, and the industry-wide rush to make the switch, the price difference between 0.5 per cent and 3.5 per cent sulphur fuels widened significantly since the third quarter, according to S&P Platts.

Global oil companies have started to upgrade oil processing units to increase compliant fuel production. However, it is estimated that the shipping industry consumes four million barrels of bunker fuels per day, while global very low sulphur fuel (VLSF) output can only cover 60 per cent of market needs.

With supply falling far short, the price spread is expected to soar between 0.5 and 3.5 per cent sulphur fuels, and push up future freight rates.

Industrial analysts estimate the liner industry is likely to be one of those hit the hardest - an extra bunker cost of US$10 billion on carriers' balance sheets is by no means a burden that can be absorbed among liner industry.

One of the major risks identified is the impact of IMO 2020 on containership supply which could see significant fleet downsizing as the consequence of carriers not being able to recover bunker cost to some fair point.

The price spread between low sulphur, IMO compliant and noncompliant fuels averages at $200 per ton, Cosco said.

Hapag Lloyd for example consumed 3.8 million tons of high sulphur fuel and 562,000 tons of low sulphur fuel in 2018, so it would be $770 million worth of extra bunker cost if the carrier replaces all noncompliant fuels to meet IMO 2020 requirements, while its total bunker cost amounted to $2 billion (18 per cent of its total cost) in 2018.

That means an astonishing 39 per cent increase to its full year bunker cost.

To be well aligned with IMO's 2050 goal to slash greenhouse gas emission by at least 50 per cent compared with 2008, the shipping industry is going to face tougher environmental policies and thus higher compliance cost. There is no once-and-for-all solution to green shipping requirements as increasing focus mounts on environmental protection and human health.

Scrubbers have become the increasingly popular option to meet IMO 2020 requirements, however, there is no guarantee that scrubbers will not be targeted next by IMO in the foreseeable future.

Ten environmental groups this year have sent a letter to IMO to call for re-evaluation of scrubbers as alternative compliance tools for 2020 fuel standards, citing evidence in US federal case against Carnival Corporation to prove its incompetence.

The example is not meant to pour cold water on carriers seeking scrubber installation, but to pose as a wakeup call for the shipping industry as a whole that, with 'greener' shipping policies on its way, all industry shareholders should take a role instead of putting on an indifferent look and pointing fingers of blame, said the Cosco press release.

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