"Low Sulfur" regulations: the impact on maritime shipping prices

The introduction of the Low Sulfur IMO 2020 regulations has fueled lively discussions between shippers and shipping companies. The AUTF (French Freight Transport Users' Association) took stock of the impact of these regulations, particularly in terms of transport prices.

Regulations by the International Maritime Organization (IMO) imposing a reduction in the sulfur content of fuels used by ships came into force on January 1st, 2020. In the short term, shipping companies had two solutions to meet the new requirements:

• Continue to use heavy fuel oil by equipping their existing fleet with smoke-filtering “scrubbers”.
• Buy very low sulfur fuel oil, VLSFO.

The third option, which is to invest in LNG vessels, can obviously only be a long-term choice.

Additional costs for shipping companies

In all cases, the companies undoubtedly faced additional operating costs, which have had an impact on price volatility.

• The installation of scrubbers requires substantial investments: between 1 and 10 million dollars depending on the engine power, the type of vessel and the downtime, according to the professionals who took part in a seminar organized by the AUTF in January to review the implementation of IMO 2020 regulations. As of January 1st, 2020, approximately 1,800 scrubbers had been installed. This figure is expected to exceed 2,000 by the end of the year. Since the beginning of the year, however, shipping companies have been facing an unforeseen problem : the coronavirus epidemic could cause additional delays in equipping ships with scrubbers. Chinese shipyards, which are among the world's leading centers for shipbuilding, maintenance and refitting, are not working to full capacity actually .
• The use of VLFSO also represents an additional cost. The explosion in demand at the end of the year even led to a period of overheating which seems to be subsiding. In the fall, shipping companies used HSFO (High Sulfur Fuel Oil) up to the last possible moment. Then everyone requested VLSFO at the same time, this created very high tension in terms of prices and demand at the end of the year. The price of this type of fuel has soared, especially in Singapore, to peak around $ 700 per tonne, which is double that of HSFO. According to industry experts, it will take a few months for this situation to rebalance. A movement that could be favored by the arrival of China on the market. In the first half of 2020 the country is due to remove a tax of $ 170 per tonne currently applied on exports and international sales of marine fuel.

Ahead of this deadline, pressure has already diminished, according to a press release published on January 21st by the IMO. "Information from various sources has indicated a relatively smooth transition to the 0.50% sulphur limit. Prices for compliant fuels - very-low sulphur fuel oil (VLSFO) and marine gas oil (MGO) rose quickly initially but now appear to be stabilizing. As of 20 January, 10 cases of compliant fuel being unavailable had been reported in IMO's Global Integrated Shipping Information System (GISIS)", the international organization said.

Shippers attentive to the relevance of overloads

In order to cope with these additional costs, the shipping companies are following in each other's footsteps by all announcing the introduction of Low Sulfur surcharges which were greeted with a certain wariness by the shippers. They do not deny the existence of additional costs for shipping companies but deplore the uniformity of the response even though the impact on costs is not the same according to which solution is chosen. "Fuel costs should not be the variable to adjust the market price as the BAF could be (...). The increase in these costs is a discretionary charge and not a mandatory tax," said Denis Choumert, president of the AUTF, urging shippers not to “lock down their all-in rates too soon" and not to "consolidate sulfur supplements into a permanent BAF”.

The market, moreover, has done its job. Surcharges were indeed applied, but not necessarily in the proportions announced by the shipping companies. A new illustration of an old reality: fluctuations in supply and demand carry more weight in the evolution of transport prices than those of costs...

Environmental pressure will increase further

Are the fluctuations linked to Low Sulfur regulations now a thing of the past? Certainly not. First of all, an important next step is fast approaching: the ban on transport of non-compliant fuel oil from March 1st, 2020. “I urge all shipowners, operators and masters to comply with the carriage ban, where applicable, when it comes into effect. IMO will remain vigilant and ready to respond and provide any support", said Kitack Lim, IMO Secretary-General, in the press release issued on January 21st.

On the other hand, the solutions in force are far from being entirely satisfactory:

• Barely deployed, the scrubbers are already coming under close scrutiny. Two types of equipment exist: “open loop” systems, which engender discharges into the sea, and “closed loop” systems, which involve the treatment of waste in specialized factories. Certain countries and certain ports have already made it known that they prohibit the discharge of wash water, as was indicated in November 2018 in the "Journal de la Marine Marchande".
• As for the VLFSO, which appears to be the most virtuous solution in the immediate future, its qualities are now already being disputed. According to a German study mentioned in an article by Splash247, this fuel would release black carbon in proportions higher by 10 to 85% than those of HSFO. This is an air particle which absorbs solar energy and contributes to the warming of the atmosphere.

To top it off, a scrubber consumes 3 to 5% more fuel, with its corresponding part of CO2 emissions. However, this issue is also on the IMO agenda, as part of its climate change strategy for shipping. This program plans to reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008. With regard more specifically to CO2 emissions, the objective is to reach -40% in 2030 and -70% 2050. In this context, LNG may be a viable option. LNG represents only 0.5% of today's market. But according to estimates by the Norwegian classification society DNV GL, this share could climb to 40% in 2050. For the moment, almost two-thirds of global demand comes from CMA CGM. The French company ordered nine LNG-powered container ships of 23,000 TEUs, the first of which was launched last September.

The initial investment is substantial, since the additional purchase cost is around 20% compared to a conventional vessel, but given the lifespan of the vessels, the choice may prove to be strategic due to the increased constraints which are emerging in terms of environmental regulations.