Transportation & Logistics Analysis

Who will foot the bill for the IMO 2020 low sulphur regulation?

November 15 2019

There is great confusion concerning the repercussions of the new IMO regulation on the sulphur content of marine fuel. What is sure is that it will result in an increase in the costs of the shipping companies, which are already struggling.

The new International Maritime Organisation (IMO) regulation on marine fuels aims to drastically reduce sulphur oxide emissions from ships. The date the regulation comes into force, namely January 1 2020, has been known for a long time. What the regulators could not have foreseen, however, is that it would come into force in market which is structurally disorientated and buffeted by an expected decline in the operating results of the 10 leading shipping companies.

This situation has created some confusion, notably regarding the way that the additional costs should be passed on. With just a few weeks to go to deadline, we propose an update on the situation.

1/ The fundamentals

  • The shipping companies can no longer wait. They need to pass their orders now if they want to buy fuel which will be on average 75% more expensive than before.
  • Shippers know that, one way or another, they will have to pay the bill for this regulatory operating surcharge. The issue, for them, is to ensure that they pay a fair price for this "compensation".
  • The need to urgently "green" the regular line shipping industry is wanted, expected and supported by a majority of the parties involved.
  • Despite pressure from the American administration, the IMO is insisting on strict application of the new regulation, which limits sulphur emissions to 0.5% (0.1% in certain zones) from January 1 2020. It has the support of the majority of states on the planet, notably those in Europe and Asia. This is fundamentally new and gives the measure credibility and leaves the United States isolated.
  • Emission checking systems are ready in the majority of major ports.
  • The cruise market, which is by its nature more visible to the general public, is also directly affected by the regulation. Major cities like Marseilles and Venice have drawn local public opinion to the subject, which has become a public health problem rather than simply a shipping issue.

2/ Questions still to be resolved…

  • To comply with the new regulation, shipping companies can continue using heavy fuel but only if they install "scrubbers" on their ships. These are giant exhaust cleaning "showers" destined to capture sulphur particles in water. Emissions in the air are thus kept below the 0.1% limit.
    But it is difficult to know at this stage if this system will be accepted by states, ports and public opinion. Some articles are already calling it a "cheater device"" and claim that scrubbers simply transfer the problem from the air to water. They argue that scrubbers could have a deplorable impact on the environment in coastal navigational zones, where underwater fauna and flora have already been compromised.
  • Questions can be raised regarding the right of companies, which decide or have already decided to install scrubbers, to impose a "low sulphur" surcharge on shippers. The surcharge is intended to cover the additional cost of acquiring of low sulphur fuel, which is generally more expensive. Scrubbers also have a cost but it is difficult to see how a formula developed to pass on the extra cost of fuel can be applied to what is a technical device.
  • If one looks at the notifications already published by the shipping companies regarding the introduction of low sulphur surcharges, one can see that the calculation formulas they have adopted involve a sort of a pro rata payment for the cost of returning empty containers. On a given route, the surcharge is not the same in both directions even though the distance is similar. Certainly, weight is a factor to take into account but the difference seems to be excessive in certain cases.
  • In the past, the shipping companies have not always been very transparent about the application of fuel surcharges. One can wonder, therefore, if they will be able to convince shippers that the formulae they have chosen are well-founded.

3/ The need for simplification

  • Shippers understand and in general accept the fact that they will need to dip into their pockets to meet the requirements of the January 1 deadline but only on conditions that certain criteria are respected. It is essential that a system be found which is simple to set up and replicate.
  • There can be no question of including the new surcharge in freight rates.
  • The surcharge must be temporary and have a cushioning effect. It should disappear once the market has adapted to the new regulation, notably by integrating the growing number of ships which will be equipped with scrubbers.
  • The level of certain surcharges which have already been mentioned is prohibitive in relation to the total journey cost. It is difficult to imagine that the market will accept such amounts.
  • Shippers have accounting procedures which make it difficult or even impossible to integrate changes in rates on contracts which are already in force. Surcharges must be highly simplified to be credible and if they are to be handled by IT systems. This is essential if they are to be paid rapidly.
  • To avoid major market distortion when the new regulation is applied, the rules need to be simple and agreed by all parties?
  • Payment of a fixed sum per container over a six-month period starting from December 1, with three separate figures for short, medium and long-distance transport, could represent an acceptable compromise for shippers. We estimate that, on this basis, the real surcharge would be about $50, $100 and $150 per container respectively over six months.

Watch this space…

Captain Upply

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
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