This has been reprinted from the Feb. 6 USDA Grain Transportation Report.
On January 1, 2020, the International Maritime Organization (IMO) implemented IMO 2020—the toughest restriction to date on international sulfur emissions for all oceangoing vessels.
It affects most U.S. agricultural exports, which move via oceangoing vessels.
Shippers and ocean carriers (including bulk and container) are closely tracking the regulation’s effect on fuel costs, surcharges, overall freight rates, and competitiveness.
This article explores market and industry responses as they have begun to adapt to IMO 2020. What is IMO 2020?
The IMO’s Annex VI of the International Convention for the Prevention of Pollution from Ships, commonly referred to as IMO 2020, mandates oceangoing vessels reduce sulfur emissions from marine fuel to a maximum 0.5 percent, by weight.
Down from the previous maximum of 3.5 percent, the current reduction constitutes the single largest drop since 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, including coastal regions of the United States, Canada, and northern Europe.
Some global media sources have called the new IMO 2020 mandate the biggest change in fuel regulations since the elimination of leaded gasoline.
Marine fuel prices.
Market prices for very low sulfur fuel oils (VLSFO) became available in October 2019, as vessel operators began preparing and testing vessels with IMO 2020– compliant fuels.
Early VLSFO market prices were well below the also-compliant marine gas oil (MGO) by 15 percent on average, but still far exceeded the non-compliant intermediate fuel oil (IFO) by 47 percent on average (see figure).
By early December 2019, prices for all major marine fuels began to increase, and the new VLSFO market increased sharply as it narrowed to within 10 percent of the MGO price.
By the January 1 deadline, VLSFO and MGO were within 5 percent of each other, or roughly $38 per metric ton (mt).
After peaking within the first week of January, prices have fallen substantially for both compliant fuels—$133 per mt for VLSFO and $119 per mt for MGO as of February 4.
Analysts attribute the decrease in prices to the coronavirus outbreak in China, as well as to the early Lunar New Year celebration, which began in late January.
Both events affected passenger flight travel, as well as freight transportation demand, pressing oil prices and ocean freight rates downward.
Industry impact.
In November and December 2019, anticipating the January 1 deadline, ocean container carriers imposed additional fuel surcharges to recover the rising cost of testing compliant fuel and slowly integrating it into regular vessel operations.
As compliant-fuel prices peaked in early January, carriers responded by increasing fuel surcharges.
Maersk, for example, announced a $50 increase in its Bunker Adjustment Factor to $200 per 40-ft container.
However, as January progressed and lower freight and flight demand softened trade markets, some analysts reported shipping rates had not climbed as high as carriers had previously anticipated.
In both bulk and container markets, spot ocean freight rates (with fuel surcharges included) were reportedly soft in the latter part of January. In some cases, the late January rates returned to levels seen earlier in 2019.
Carriers are concerned that although fuel prices have fallen since early January, the price of the compliant fuel remains significantly higher than the traditional IFO.
Without an increase in rates (including fuel surcharges), carriers run the risk of not recouping the additional cost of the fuel during the first quarter.
Shippers worry that when demand recovers carriers will significantly increase rates to recoup losses in January