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IMO's rule to cut sulphur content in ship fuel could trigger chain of price surges

THE International Maritime Organisation's new regulation for the world's ocean-going vessels to use fuel with a maximum sulphur content of 0

IMO's rule to cut sulphur content in ship fuel could trigger chain of price surges
21 August 2018 - 19:06

THE International Maritime Organisation's new regulation for the world's ocean-going vessels to use fuel with a maximum sulphur content of 0.5 per cent down from 3.5 per cent starting from the beginning of 2020 could push up diesel prices by 20 to 30 per cent, according to the International Energy Agency.

The new rules for the global oil market may also disrupt fuel supplies to all modes of transport.



The last time diesel prices shot up as much as the IEA is predicting was mid-2008, according to data from A. At that time crude oil hit a record high of US$145 a barrel.



The IEA estimates three million barrels a day of high-sulphur bunker fuel is used by the global shipping industry. Some ships may keep using the fuel after 2020 by installing scrubbers to clean up emissions, or just ignore the rule and take the chance on heavy fines. A few may switch to new ships that run on liquefied natural gas, reported Bloomberg.



But those options may be too expensive, so the IEA expects many ship owners to upgrade the fuel they use. That would spark a rush on existing supplies of middle distillates like diesel and jet fuel. When the standards come into effect, global demand for diesel could surge by one million barrels a day to 29.7 million, the IEA estimates. That's more than the combined gains of the past four years.



'The consensus is that it will be expensive as hell,' said World Shipping Council CEO John Butler. 'It will dwarf anything we've seen as an external cost on the industry.'



Refiners in some parts of the world may initially struggle to add enough extra supply. Without expensive upgrades, it would be difficult for refineries to drastically change the mix of products they create from each barrel of crude. That poses a potentially big problem for industries that need diesel, though few are doing much to prepare and many small operators don't even know it's coming.



'Everybody missed this in our industry,' said American Trucking Association vice president Glen Kedzie. The organisation began alerting trucking company owners a few months ago and found that most had never heard of IMO and didn't know about the risk to fuel markets. 'No one knows about this,' Mr Kedzie said.



Among the truckers, airlines and railroads that are aware, many hope they can simply pass along the increased cost in the form of fuel surcharges or higher ticket prices. However, smaller operators may have less flexibility to charge customers more or the financial resources to withstand a prolonged increase in fuel costs, Mr Kedzie said.



For the airline industry, where fuel is expected to account for a quarter of operating expenses this year, companies are more likely to pass along the costs to passengers and adjust flight plans or plane loads, according to Macquarie Group Ltd, which conducted a survey of 27 airlines about the impact of the IMO regulations.



'It's not like overnight you're going to see a huge jump in fares,' said Macquarie analyst Susan Donofrio. It may take three to six months after fuel costs rise, she said.

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