IMO 2020 ReCap
From 1st January 2020, a new regulation will come into force to reduce air pollution from ships globally. Whereas today ships can use fuel with up to 3.5% sulphur content (outside Emission Control Areas), the new global sulphur cap will be 0.5%. The cost of compliance with the new regulation will be significant, so the cost of shipping will increase.
Shipping must continue to look for ways to reduce emissions while meeting the world’s growing demand. As Shipowners step up to that challenge, IMO and marine societies will continue to provide the solutions they need. This includes implementing several initiatives in preparation for IMO 2020, along with introducing its new Very Low Sulphur Fuel Oil (VLSFO).
A landmark decision to implement the 0.50% sulphur limit for marine fuels in use on ships operating outside sulphur emissions control area (ECA-SOx) from 1 January 2020 has the industry scrambling for solutions. The decision has not been without scepticism and triggered an intense debate amongst stakeholders about implementation framework and 0.50% Very Low Sulphur Fuel Oils (VLSFO) availability and quality.
Various market surveys indicate that most shipowners and operators intend to comply with the MARPOL Annex VI regulation 14.1.3 by burning 0.50% VLSFOs. As a member of various industry forums, LR’s FOBAS (Fuel Oil Bunker Analysis Service) team is actively participating in these discussions to help guide the industry by carefully considering operators requirements and concerns.
Please find here below and attached some important information regarding the Low Sulphur IMO 2020 Regulation which will be applied as from 1st January 2020 on the whole shipping industry.
Fuel costs will rise by an estimated 25 percent (approximately $24 billion) in 2020 when the new International Maritime Organization (IMO) sulfur rules take effect.
The IMO, the United Nations body responsible for the shipping sector’s safety and environmental performance, aims to cut maximum sulfur emission from 3.5% m/m (mass by mass) to 0.5% m/m starting in January 2020.
Even as the new sulfur emission rate deadline draws near, the industry appears ill-prepared. The IMO sulfur rules are likely to mark the beginning of an uncertain era for not just the shipping industry, but many other sectors, as over 90 percent of global trade operates via the sea.
Let’s explore how the IMO 2020 regulations will affect capacity and freight rates:
The new BAF surcharge aims at recovering container shipment costs of compliance with the global sulphur cap which enters into force on 1 January 2020.
For Long term deals, BAF Q1 2020 will be based on average price of VLSFO (Very Low Sulphur Fuel Oil ) 0.50% of September/October/November 2019. This floating BAF will be revised on quarterly basis.
For Short-term contracts (up to 3 months validity) - not subject to floating BAF – LSS (Low Sulphur Surcharge ) will be applicable as of December 1st, 2019. As per our last announcement related to calculation, the retained value is USD 200 per ton, which is multiplied by trade coefficient.
December 2019 LSS will be calculated as follows:
December LSS IMO 2020 = (October VLSFO price per ton – October 2019 HSFO (High Sulphur Fuel Oil ) price per ton) × TRADE COEFFICIENT (0.6 in case of Asia to MED)
Update on Bunker Adjustment Factor (BAF)
As previously communicated, our revised Bunker Adjustment Factor (BAF) is designed to adjust contract rates within the duration of a contract, based on fluctuations in fuel-related costs. It applies to contracts with validity longer than 3 months. In 2019, we have used the fuel price for high-sulphur fuel (3.5% sulphur) to calculate the BAF. From 1st January 2020, the BAF tariff will be calculated based on the fuel price for 0.1% sulphur gasoil with a fixed deduction of 50 USD/ton.
The implications on freight rates
While predictions show capacity will remain somewhat stable, freight rates will rise significantly. Staying compliant with these new sulfur laws will cost the liner industry approximately $15 billion. For context, an Asia to North Europe round trip could cost an additional $1 million after the sulfur emission laws take place.
It’s important to note that the expected rise in shipping rates is coming high on the heels of the recent attempts by top carriers such as Maersk, CMA, CGM, and MSC to add bunker charges. The bunker surcharges of summer 2018 show just how unprepared shipping liners are for rising fuel rates.
The IMO’s low sulfur cap is a game-changer because it affects the entire industry. Factors like the cost of installing scrubbers, the unpreparedness of stakeholders, and the expected shortage of compliant fuel have made freight rates difficult to predict.
Even as uncertainties from the IMO low--sulfur rule looms, the best way to ensure your operations run smoothly is working with a qualified, experienced, and committed 3PL firm. A lot of logistics companies are going to utilize theirs experience and good relationship with suppliers, haulers, and carriers to ensure that your supply chain runs as expected without interruptions. Will see how it goes in shipping of containers and bulk.
New Environmental Fuel Fee (EFF)
Effective from 1st December 2019, Maersk will introduce a Environmental Fuel Fee (EFF) on all trades, which will apply to all spot business and contracts with validity up to 3 months. The EFF tariff will be trade-specific and reflect the fuel-related cost increases that result from compliance to the IMO 2020 regulation (calculated as the price difference between high sulphur fuel and low sulphur fuel multiplied by a trade factor). The EFF tariffs will only be reviewed in case of significant fuel price fluctuations (more than 50 USD/ton). The EFF tariffs applicable from 1st December 2019 will be announced end-October 2019.
The overall shipping capacity will likely remain the same when the IMO deadline arrives. However, some carriers will experience a slight decline in capacity when trying to comply with the new ICO rules.
With the looming shortage of low-sulfur fuel and the high cost of converting to a liquefied natural gas (LNG) system, more carriers will install scrubbers to remain compliant with the IMO 2020 rules.
In some cases, the IMO 2020 regulation may actually increase capacity as ship line producers aim to create new eco-friendly vessels to enter the market. New vessels would increase the supply of available capacity and increase fuel efficiency by 30 percent compared to older vessels.
Please do not hesitate contacting us if you have any questions on the impact on your business of the IMO 2020 regulation.
We thank you in advance for your understanding and support.