5 Leading Impacts to Consider with IMO 2020: Risk and Uncertainty in Ocean Shipping from New Emissions Rules – Part One
In this two-part blog series, the first entry will cover the first three major impacts from IMO 2020 that we see on the horizon. Part two, available next week, will cover additional impacts the mandate will have as well as some steps organizations can take to minimize any negative consequences.
The urgency with IMO 2020
On January 1st of 2020, the International Maritime Organization (IMO) low sulfur mandate takes effect worldwide with a goal of reducing sulfur emissions from ocean vessels by 80%. The strict enforcement plan and punishment for non-compliance threaten to upend the ocean carrier industry in the short term, impacting capacity and operating costs, with significant potential to increase shippers’ overall cost for ocean transport while also slowing supply chain velocity worldwide. Here are the first three things to know as the January 1 deadline approaches.
1. Impact on the ocean carrier community
The emissions mandate drastically reduces the permissible amount of sulfur oxides released from ships to reduce air pollution. In order to comply, existing marine vessels will require ‘scrubber’ technology retrofits to reduce engine sulfur output from the use of conventional marine bunker fuel or switch over to a much higher-priced low-sulfur fuel for ongoing operations.
There are roughly 60,000 active vessels today running on traditional bunker fuel. Only 17% of container fleets currently have scrubbers to meet the new requirements with another 500 vessels expected to come out of the water in the next few months for installation. The remaining vessels are expected to switch to low-sulfur fuel use, although worldwide supply of the new marine fuel will be spotty as energy supply chains adjust.
There is firm commitment to enforcement of the new IMO rules, particularly at major transportation hubs. Processes are already in place at major bunker fueling locations such as Rotterdam's preparation of drone technology to sniff out sulfur emissions. There are suggestions of up to two-year prison terms for ship captains found guilty of non-compliance. Blue-chip carriers—wary of brand reputations—don’t want to labeled as polluters, and additional industry pressure is being applied from maritime insurers, who may pull coverage from carriers that are non-compliant.
2. Impact on energy markets
Switching to low sulfur fuel will initially be the primary option for IMO 2020 compliance because scrubber retrofits are costly investments for cash-strapped ocean carriers. Major fuel suppliers are shifting production to increase availability of the low-sulfur diesel in preparation for the year-end cut-over from much conventional fuel use, but uncertainty remains.
What is certain is that prices for both regular diesel and low sulfur fuel oil will increase. Conventional bunker fuel prices are expected to drop in the near term, and industry analysts expect wider ocean carrier adoption of scrubbers by 2025, gradually reducing total demand for low-sulfur fuel. Although liquified natural gas (LNG) is widely viewed as the fuel of the future—cleaner and with lower carbon dioxide and sulfur output, the mainstream usage of LNG by maritime vessels is still years away.
3. Impact on carrier capacity and shipping costs
A drop in freight capacity should be expected in the new year as older ships are decommissioned and still others are removed from service for a 4-6 week scrubber installation. Smaller carriers may be forced out of business altogether if they cannot afford the vessel retrofits and don’t succeed in passing at least some of the higher fuel costs to shippers.
To offset the increased cost of low-sulfur fuel, carriers are warning of new fuel surcharges coming in the next several months – some effective as early as October and November of 2019. As a whole, carriers have not yet aligned on the new surcharge timing and each shipping line seems to be referring to the new charges by different names.
Container lines historically have difficulty holding to pricing increases and new surcharges, but the estimated $13-15B increase in industry fuel costs will have to be offset or mitigated in some fashion to ensure carrier survival.
Start planning for potential disruptions now
With IMO 2020 just around the corner, shippers should be heavily engaged in conversations concerning their strategy and how this mandate will affect their operations. Stay tuned next week where we cover another two major impacts and the steps your organization can take to address rising concerns.
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