The new sulfur limit that takes effect in 2020 has led to a scramble for compliance options, as the ocean freight industry grapples with the impact of increased costs and potential supply chain disruptions. Ship owners and operators are hedging their bets on alternative sources of fuel, but all options require significant investments that will further put pressure on shipping rates. Our blog post navigates the turning tides.
Time is slowly but steadily running out as the shipping industry gets ready for the new sulfur regulation introduced by the U.N. International Maritime Organization (IMO). From January 2020, the sulfur content of bunker fuels will be limited to 0.5 percent, down from the current 3.5 percent in most parts of the world.
Scrubbers, systems that clean exhaust gases, offer a way out. However, their impact on the environment is open to debate and has led regulatory bodies to push for more rules and guidelines, as our previous blog post shows.
LNG as an alternative
As the industry assesses the use of scrubbers as an abatement measure, others are exploring alternative sources of fuel that have lower sulfur oxide emissions. One alternative is liquefied natural gas (LNG) or clean gas, which leads to negligible sulfur emissions when ignited.
While a global LNG bunkering network remains underdeveloped to date, some hubs are racing to develop their infrastructure for LNG bunkering operations:
- Singapore-based yard group SembMarine is to launch new LNG bunker vessel designs this year.
- The two giant South Korean shipbuilders, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering, accounted for about 70 percent of the orders for large LNG carriers exceeding 170,000 cubic meters last year.
- Energy giant BP recently predicted that global LNG trade would more than double to 900 billion cubic meters by 2040, from 400 billion cubic meters in 2017.
- French carrier CMA CGM has placed its bets on both options and ordered 10 mega vessels (15,000 TEU) from Chinese state shipbuilder CSSC: five will be fueled by LNG and five will be fitted with scrubbers.
Is low-sulfur fuel the way to go?
Although the race is on for alternatives, the most straightforward way to comply is to use low-sulfur fuel. However, there are concerns over higher costs and fuel availability, in the right quality in time.
US consultancy AlixPartners estimates that container lines could be looking at an additional $10 billion in fuel costs to comply with the 2020 sulfur cap.
“It is not in the bread-and-butter interests of ship owners who are struggling to digest overcapacity to switch to higher-cost low-sulfur fuel alternatives,” writes Lloyd’s List journalist Hwee Hwee Tan.
Changing tides in ocean freight
In an industry with tight margins, the sulfur cap will further put pressure on ocean freight rates.
The report from AlixPartners notes that: “Significant revenue increases seem unlikely in 2019, in light of growth in fleet capacity that continues to exert downward pressure on rates for most major trade routes, including the busy westbound Asia-Europe lane. Even the rates boost carriers witnessed on the trans-pacific trade in the second half of 2018 ahead of expected tariff increases is set to fade.”
The new regulation could lead to more slow-steaming and use of trans-shipment, as carriers seek to mitigate the expected higher operating costs.
According to industry analyst Drewry: “The logic is that as ships’ sailing speed is reduced and round voyages are extended, carriers will drop ports from rotations to ensure that transit times to key points remain competitive. Fewer direct port calls will induce greater need for trans-shipment and feeder operations.”
Shipping remains, to quote Dimitrios Lyridis, associate professor of maritime transport at the National Technical University of Athens, the “most environmentally friendly” mode of transport for global trade. A study by the university’s Laboratory for Maritime Transport shows that just 2,000 container ships are responsible for one-third of all emissions from deep-sea shipping, while bunkers and tankers are three times more efficient.
What’s clear is that debates on the pros and cons of different compliance measures will continue as the sulfur cap deadline nears. In a twist to the ongoing tale: There is no uniform global policing of regulations and provisions through the IMO. Each individual signatory nation is responsible for determining its own enforcement policies, and while these will vary from jurisdiction to jurisdiction, all non-compliant vessels can expect civil, and possible criminal, sanctions.
With interesting developments ahead, Panalpina is committed to proactively providing its customers with qualified advice and information about the new sulfur regulation and its impact on global supply chains.
“We have been developing a transparent and competitive pricing mechanism to cut the best deal for our customers,” says Joerg Twachtmann, Panalpina’s global head of Ocean Freight FCL. “We now have a globally competitive bunker mechanism that will increase visibility for customers and ease the transition towards new fuel types to comply with the sulfur limit.”