This article has been reprinted from the April 11 USDA Grain Transportation Report.
The International Maritime Organization (IMO), under Annex VI of the International Convention for the Prevention of Pollution from Ships, mandates ocean-going vessels reduce the amount of sulfur emissions from marine fuel, by January 1, 2020. *
The regulation requires vessels to limit sulfur emissions in fuel oil to a maximum of 0.5 percent, by weight, from the current maximum of 3.5 percent.
This is the largest single marine fuel standard reduction since the IMO began tightening sulfur oxide emissions standards in 2005.
The last mandate, in 2015, decreased sulfur emissions in designated emissions control areas (ECAs), from 1 percent to 0.1 percent. ECAs were established for major global ports and coastal regions.
Some global media sources have called the new IMO 2020 mandate the biggest change in fuel regulations since the elimination of leaded gasoline.
Though the mandate will not be implemented until January 1, 2020, ocean carriers and shippers are uncertain how supply and demand for this new blend of fuel will impact freight costs.
The majority of U.S. agricultural trade moves by ocean vessel, leaving much of the agricultural export community vulnerable to the impacts of the new mandate with uncertainty and higher costs.
The IMO and the U.S. Department of Energy (DOE) have written several articles and resources detailing the regulations and possible impacts the new mandate could have on the industry.
The remainder of this article summarizes their findings and presents the latest impacts on ocean freight costs and contract negotiations.
Options for Compliance To comply with the new IMO standards, vessel operators have 3 options:
1) They can install “scrubbers” that filter sulfur oxides from the ship’s engine and broiler exhaust gases, which allows the continued use of marine fuel oils with 3.5 percent sulfur content.
2) Operators can use marine fuel refined to a low-sulfur content to meet the new requirements. These fuels include marine distillate fuel and ultra-low sulfur fuel oil blends.
3) Ships with compatible engines can use liquefied natural gas or biofuels, which emit emissions well below the new mandate.
Ocean carriers and shippers are concerned each of these options comes with an increase in cost.
A small percentage of the global vessel fleet is expected to be retrofitted with scrubbers or engineered to operate on liquefied natural gas or biofuels, leaving most of the fleet to rely on compliant marine fuels.
Current heavy marine fuel—used in most ocean-going vessels—is made from what is left of the crude oil after it is refined for other fuel products.
In 2020 and beyond, further refining and blending of these products will be required for compliance.
Refineries are beginning to test some blended fuels for compliance and compatibility with vessel engines.
Industry Forecasts Shippers are concerned about sufficient supplies of compliant fuels after January 1, 2020, as well as increases in fuel prices and surcharges in the fourth quarter of 2019 leading up to the implementation date.
A study commissioned by IMO assessing fuel oil availability concluded the refinery sector has the capability to supply sufficient quantities of marine fuels to meet the new mandate.
IMO concluded the capacity is sufficient for marine fuels with:
(1) sulfur content of 0.50 percent by weight or less, and
(2) sulfur content of 0.10 percent by weight or less.
This is in addition to meeting the demand for non-marine fuels. *
According to a recent article from DOE’s Energy Information Administration (EIA), the change in sulfur limits has wide-ranging repercussions for the global refining and shipping industries, as well for petroleum supply, demand, trade flows, and prices.
The article continues, “…shipping and refining industries have already begun making preparations and investments to varying degrees to accommodate IMO 2020 regulations.
"As the implementation date for the 0.5 percent sulfur cap approaches, the U.S. Energy Information Administration (EIA) expects that shifts in petroleum product pricing may begin as early as mid-to-late 2019.
"EIA anticipates that the effects on petroleum prices will be most acute in 2020, and the effects on prices will be moderate after that.
"However, the regulations will affect petroleum supply, demand, and trade flows on a more long-term basis.”
The Trade Industry Prepares for Increasing Costs Ocean carriers are preparing for increased fuel costs, starting in the fourth quarter of 2019.
The full picture of how much the new fuel will cost and how long it will take to stabilize supplies and logistics, is unknown.
According to top ocean container carriers, the new mandate could cost the industry an extra $10-15 billion annually.
Because of this, carriers are insisting on a separate fuel surcharge calculation included in recent contract negotiations.
Transpacific annual service contracts, between ocean container carriers and importers and exporters, run from May 1 to April 30.
This means shippers and carriers must make critical decisions about the new mandate now.
According to a recent article in the Journal of Commerce, carriers are holding firm to the fuel surcharges being included in the service contracts, and shippers are reluctantly accepting them.
In some cases, carriers are including a floating surcharge to be adjusted in the fourth quarter when prices are expected to rise as the January 1 deadline approaches.
An additional $150 fuel surcharge, per container, could increase U.S. average export container freight rates by 20-30 percent.
According to data provided by Ship & Bunker, average bunker fuel prices at the top 20 global fueling ports have increased 15 percent since early January.
However, prices are 14 percent below the record set in October 2018.
As the year progresses and demand for the low sulfur fuel increases, prices could rise.
Shippers and carriers should continue to monitor the situation closely.