Summary
- UNCTAD says the implementation will bring new challenges in the shipping industry, particularly in container shipping, prompting the UN agency to come up with several options for carriers.
- January, 1 2020 marks the full implementation of the IMO 2020 regulations reducing the content of sulphur in fuel oil from 3.5 percent applied since 2012, to 0.5 percent in 2020.
The United Nations (UN) has warned of global higher freight
rates and additional costs as carriers comply with the IMO 2020
regulation on Sulphur that will come into force on January 1,2020.
In
its report on Review of Maritime Transport, 2018 United Nation
Conference on Trade and Development (UNCTAD) says the implementation
will bring new challenges in the shipping industry, particularly in
container shipping, prompting the UN agency to come up with several
options for carriers.
January, 1 2020 marks the full
implementation of the IMO 2020 regulations reducing the content of
sulphur in fuel oil from 3.5 percent applied since 2012, to 0.5 percent
in 2020.
This will significantly reduce the amount of
sulphur oxides emanating from ships, improve air quality in port cities
and coastal areas and meet global climate change objectives.
“Bringing
emission levels to under 0.5 per cent mass/mass will mark the beginning
of a new era that will bring about fresh challenges and require a
radical change by the shipping industry. For carriers to comply with the
new IMO 2020 regulation, three main options are currently available,”
said the report.
The most direct option, according to UNCTAD, is for carriers to
switch to low-sulphur fuels such as low-sulphur residual fuel oil,
very-low-sulphur fuel oil, or low-sulphur distillates such as marine gas
oil.
“This would inevitably entail additional costs
and higher freight rates, given that the price of high-sulphur fuel is
lower than that of low-sulphur fuels, as the latter are more costly to
produce. The price of low-sulphur fuel stood at about Sh60,000- Sh70,000
per metric tonne in March and April 2019, while that of the traditional
bunker fuel oil was about Sh40,000–Sh45,000 per metric tonne and the
price differential between high-sulphur bunkers and marine gas oil was
about Sh17,000 and Sh32,000, respectively, per metric tonne,” said the
report.
The second option is carriers could continue to
use cheaper high-sulphur fuel oil and install scrubbing equipment to
remove sulphur from the ship engines’ exhaust system.
“However,
installing these scrubbers will come at a cost. Various sources have
estimated that installing scrubbers can cost between Sh200 million and
Sh1 billion. They are also made by a limited number of manufacturers
around the world that may not be able to meet all demand. Hence, as
mentioned previously, this would influence the carriers to turn to
scrapping, in particular for older vessels of smaller tonnage, with more
ships likely to be scrapped towards the end of 2019,” said UNCTAD.
Another
concern for ships fitted with scrubbers would be the availability of
high-sulphur fuel oil to meet the demand and the impact on price if
refiners move to significantly restrict the sale of such fuel oil.
The
third option for ships, according to the report, would be the use of
cleaner alternative fuels such as liquefied natural gas or methanol.
However, it is estimated that liquefied natural gas production could
cover only 10 percent of the required shipping fuel by 2040. In
addition, ships fitted with liquefied natural gas tanks will require
more physical space on board, taking up almost 3 percent of a vessel’s
TEU slots.
“As a result, this will reduce the number of
containers that can be carried. Also, due to the expected large
increase in demand for liquefied natural gas fuels, it has been reported
that the price of liquefied natural gas may increase as much as 50
percent. As for other alternative sources of fuel, such as biofuels and
hydrogen, they are mostly sin the research and development stages,” said
the report.
“Therefore,
compliance with the IMO 2020 regulation will bring new challenges in
the shipping industry, particularly in container shipping. Key issues
for consideration may include higher costs and price volatility, as well
as reduced capacity and increased transit time.”
UN
has, however, warned that these additional costs may have an impact on
the price to be paid by the end user as carriers will attempt to pass on
increased costs to shippers through various forms, including new bunker
surcharge formulas.
“It is argued that if these costs
are not passed on to shippers, profit margins in the container shipping
industry would be reduced and may lead to bankruptcies of the most
financially vulnerable carriers,” the report said.
UNCTAD added that this may also prompt further consolidation in the container shipping industry.
“In
recent years, carriers have been struggling to find ways to cover their
losses and have applied various bunker charge programmes to mitigate
these costs. For example, in 2018, carriers turned to a cost-recovery
programme applying emergency bunker surcharges and passed the costs on
to shippers.
Shippers may be at risk of receiving a new
set of emergency bunker surcharges that is projected to be between 15
and 20 per cent higher once the regulations enter into force.
Six
global container lines – Maersk Line, Mediterranean Shipping Company,
CMA CGM/American President Lines, Hapag-Lloyd, Orient Overseas Container
Line and Ocean Network Express (ONE) – had already outlined a new price
mechanism for the bunker adjustment factor (also known as marine fuel
recovery or the bunker recovery charge) that would replace the old
formulas on January,1 2020 to cover fuel costs, as prices are expected
to surge because of tighter environmental standards from 2020,” the
report said.
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