The twists and turns from what might seem like an obscure decision by the International Maritime Organization to dramatically reduce sulfur emissions from cargo ships continues on, with the stakes very high indeed.
In April, the IMO announced new rules for the global ocean shipping sector, scheduled to go into effect Jan. 1, 2020. With a goal of reducing emissions from high sulfur bunker fuel used by both cargo and container ships by some 80%, carriers have three options:
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1. Use low sulfur fuel oil (LSFO): This is the most likely option for most owners, both for existing and new build vessels, the analysts at Drewry say. While there may be a big spike in fuel prices as demand increases, prices should eventually come down as supply increases. Similar fuel cost increases have in the past been passed on to shippers.
2. Using exhaust gas cleaning systems (scrubbers): Several issues have meant scrubbers are struggling to become a popular option, such as their cost, complexity and uncertainty about future regulations which may require retrofitting. Added to that, as LSFO gains in popularity, owners may find it increasingly difficult to find currently dominant high sulfur fuels, which may influence their price as well.
3. Installing dual fuel engines capable of burning liquid natural gas (LNG): This is mainly an option for new vessels trading on fixed routes or regionally in areas where better LNG bunker facilities are in place and being developed, such as Northern Europe.
The ramifications of these requirements are huge, many experts and carriers say, warning the rules could cripple the already financially struggling cargo carriers with much higher fuel and/or scrubber costs that the lines will be unable to cover with surcharges to shippers. In fact, the CEO of one carrier said the rules could cause bankruptcies for some companies
"We're all going to go bust," Junichiro Ikeda, CEO of Japanese container carrier MOL, said in June.
Just last week, Paddy Rogers, CEO of Belgium-based Euronav, one of the world's biggest tanker companies, said low freight rates and the rising fuel bill could push the top 10 tanker operators into the red this year.
Some have even said the high costs that the rules will place on global trade could do damage to the economy – and maybe even lead to recession. As refiners switch over to the low sulfur fuels, it could also drive the price of regular gas and diesel fuels up.
US energy giant Exxon Mobil said the change is "one of the industry's most defining moments since the shift from coal."
The Trump administration appears to have such concerns, saying last week it wants to ease the rollout because of the impact it may have on the economy and energy markets. The White House projections suggest the global economic costs of the rules could surpass $100 billion, with the US portion of that potentially rising to more than $10 billion.
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The US and a number of other countries are asking for the IMO to delay or phase in the requirements over a longer period. A White House spokesman said the administration wants to phase in implementation to allow "experience building" that would lead to better understanding of the availability of cleaner fuels and their impact on ship operations.
Meanwhile, MDrewry says ocean carriers are taking a variety of strategies to meeting the new requirements.
MSC, HMM and Evergreen are reportedly opting for a scrubber strategy. Maersk, which estimates the IMO ruling will add approximately $2 billion to its fuel bill and is imposing new surcharges on shippers, originally said that it would exclusively use low-sulfur fuel oil, but has since decided to fit scrubbers on a small portion of its fleet.
Both Cosco and Yang Ming have expressed intentions to rely on LSFO, which is also the preferred option for Ocean Network Express (ONE), although the Japanese collective is also considering scrubbers and LNG as back-up options. Hapag-Lloyd is aiming for a "balanced portfolio" of all three options.
In others words, it's a big mess.
The IMO has indicated it might delay the start of the rules for a couple of months, a more lengthy delay or phase in does not appear to be something it will consider.
"There's been enough time to prepare," IMO Secretary-General Kitack Lim told the Wall Street Journal earlier this month. "I understand shipping is going through a difficult period, but as far I am concerned, the implementation date cannot change."
SCDigest expects there to be some modest delay in the start date, but that the rules will kick in sometime in 2020, with an impact that no one can really predict.
Do you think we will see any delay in the IMO mandate? How big will the impact of the rules be? Let us know your thoughts at the Feedback section below.
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