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Cost of IMO 2020

by Bunkerist
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The United Nations International Maritime Organization (IMO) launched the low sulfur fuel regulation on January 1, 2020. The full implementation begins on March 1. IMO 2020 includes environmental pollution from ships referred to as Marpol (or Marine Pollution Treaty 1973. Annex VI). However, there is an option to apply stricter standards based on local jurisdiction in some regions. Therefore, as a minimum standard, IMO 2020 applies to international waters.

The marine sector is held responsible for 90% of sulfur dioxide from all modes of transportation. Sulfur-dioxide is a pollutant that is harmful to the respiratory system and adds acidity to the air, which can damage crops and vegetation. Only 15 of the world’s largest ocean liners produce more sulfur dioxide than any car in the world.

IMO inspects 174 countries with signatures in the agreement. The global merchant fleet is 53,000, of which approximately 18,000 general cargo and 12,000 bulk cargo. Container ships carrying the most valuable cargo per tonne are approximately 5,000 in number.

According to IMO 2020, the maximum sulfur content of the bunker fuel to be used in ocean ships has been reduced from 3.5% by weight to 0.5% (i.e. 86% reduction in sulfur content) determined in 2012. This applies to all fuels used, in the main engines, auxiliaries and boilers. This is the biggest change in international sulfur emission standards and although it has been on the industry’s radar since IMO’s announcement in 2016, many ocean liners will endeavor to comply with the rule. In addition, IMO has determined Emission Control Areas (ECA) where the standard is even more stringent. ECAs include: the Baltic Sea, the North Sea and Canada, the Caribbean (especially Puerto Rico and the US Virgin Islands) and the designated coastal areas of the USA.

In this case, the ships have three options; first one is using low sulfur fuel, secondly using heavier and cheaper bunker fuels by adapting flue gas cleaning systems (scrubber) despite high expences. The last one is to applying to Flag State  for a waiver on behalf of IMO. Of course the third one is valid if it is proved that acceptable alternative fuels are not available and cannot be purchased.

If the demand for low sulfur fuel rises faster than the current supply, it is inevitable that prices will increase in the near term. And it has increased. But there has been significant price reductions towards the end of January 2020. Beyond basic economics there are logistic constraints of time, physical space and location. While it is possible that some ports may have adequate compatible fuels, others may not. In such a situation, the supply chain and transportation networks cannot be expected to be structured quickly enough to prevent such a price increase. Operational units should manage the strategies to be made until a satisfactory supply of fuel is achieved. The first thing that comes to mind is that they store their fuels early, in large quantities, which means buying more fuel that is likely to drop in price due to waivers and uncertainties. This creates a disadvantage such as the density of traffic in that area. Density nourishes high prices. It is another option to overcome this transition period by decreasing or increasing the speed of the ships.As a matter of fact, there have been no bleak negativities ever. Diesel fuel, which is a low sulfur option, did not increase significantly. This is good news, given that IMO 2020 indirectly affects other transportation facilities (ie trucks and railways) that use diesel fuel. Very low sulfur fuel oil (VLSFO) is also available in major ports (eg Rotterdam and Singapore) that meet IMO 2020 standards.

VLSFO prices have been described as “rollercoaster” since December 2019. Singapore price rose to $ 740 per metric ton on January 7, 2020, and has since fallen to $ 641 on January 22, 2020, the price distribution between VLSFO and heavy bunker fuel dropped to $ 340 per metric ton before falling to $ 284. It reached. Despite the narrowing of the price between the two fuels, many carriers can invest in washer systems starting from about $ 2 million per ship and up to several million depending on the type and size of the ship. This is the classic cost-benefit problem of undertaking upfront costs against estimating the reduced cost of a more variable commodity over time.

Despite the final savings from washers, there is still a monetary risk based on external resources, according to VLSFO. This is the classic social cost-benefit issue that a firm must consider larger environmental impacts beyond its own market. IMO can eventually ban heavy bunker fuel so that the purpose of the washers becomes invalid. Washers can be banned due to the waste water that needs to be drained. As washers become more common under IMO 2020, will such a radical decision be made against the risk of soil contamination of sulfur particulate matter for wastewater spills? While the Exhaust Gas Cleaning Systems Association estimates that approximately 6,500 ships will have washers by 2021, what is the attitude of IMO in updating its regulations?

In any case, ocean ships will undertake more costs as they adapt to IMO 2020. They will definitely try to communicate these costs to their customers as a bunker adjustment factor (BAF) or surcharge. These will also be taken into account when negotiating freight rates.

Carriers that purchase the same fuel type face roughly the same cost per ton. However, they can carry bulk cargo or containers with very different freight rates per ton. An additional capacity in a shipping lane positively affects transport costs.

Trans-Pacific trade lines slowed in the US-China trade war. It is too early to say what the effects of the “Phase 1” US-China trade agreement will be. There are reasons that make it difficult to predict the net effect. Some shippers may feel pressure to accept the carrier’s BAF formula, while others may negotiate its structure.

Liquefied natural gas (LNG), which does not produce sulfur emissions, is another option. However, usage conversion from heavy bunker fuel to LNG is even more expensive. By the way, LNG tanks are needed to be slightly larger since the LNG density is lower than bunker fuel.

Although less than 5% of the global fleet is working with LNG, there is no doubt that carriers will consider new ship orders for the next decades due to IMO 2020’s current and possible future regulations.

Years of planning for IMO 2020 has displayed the consequences so far. Green policies for the blue sky will surely keep all business and government, key players, flag states engaged in the coming years.

Bunkerist

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