New Limit for Sulfur in Fuel Oil Will Ultimately Increase Shipping Costs
Margaret Lange | M.E. Dey & Co.
The International Maritime Organization (IMO) has set a limit of .050% m/m (mass by mass) for Sulfur in fuel oil used on board ships worldwide. The new regulations are set to take effect on January 1, 2020 and will significantly reduce the amount of harmful Sulfur Oxide emanating from ships with major health and environmental benefits for the world.
Carriers can meet the new requirements by using low-sulfur compliant fuel, or by installing sulfur scrubbers, which would allow them to continue using lower-cost high-sulfur fuel. According to the JOC, only about 5% of the 80,000 ships are expected to be retrofitted with scrubbers by the 2020 deadline.
The higher cost of low sulfur fuel will increase operating costs for container lines. Fuel is an operations cost, and to recoup those costs, carriers will implement Low Sulphur Fuel Surcharges in annual trans-Pacific service contracts. Although this will increase costs for shippers, the surcharges will allow carriers to maintain capacity and service.
Carriers tell JOC.com that they are separating fuel and freight costs in annual service contracts, despite a historical preference for “all-in” contract rates. While each carrier is expected to handle pricing in its own way, some carriers have already begun to build in the new surcharge into contracts to prepare for the 2020 regulation implementation
The IMO 2020 mandate is estimated to cost carriers as much as $265 per FEU to the West Coast and $700 to the East Coast compared with traditional bunker fuel. Service contract negotiations are likely to contain clauses, that the carrier and shipper agree with, finalizing a floating bunker adjustment factors (BAF) in the fourth quarter. Developing a mutually-agreeable, low-sulfur bunker fuel formula will be a multi-step process that will extend through much of the year, said George Goldman, president of Zim American Integrated Shipping Services. Importers that ship through the East and Gulf coasts will pay higher low-sulfur BAFs than those that ship through the West Coast, given that more fuel is consumed during the longer voyages. As the length of the voyage will be a factor in the new BAF formulas, the parties must then agree upon a new formula.