Financiers worry that 2020 sulphur cap will increase freight rates06.03.2019
Ahead of the 2020 sulphur cap, Seabury Maritime notes that the new emissions standards will increase freight rates. In particular, the shipping industry does not have a standard for fuel-surcharges computation, while the costs of low-sulphur fuel are only rough estimates and do not provide a clear picture.
A report produced by Seabury Maritime in collaboration with Gemini Shippers Group, highlights the challenges that have occurred regarding the implementation of the 2020 sulphur cap.
As the shipping industry will have to reduce its SOx emissions from the current 3.5% to 0.5%, operators are still not sure how this regulation will impact costs and freight rates as they enter the 2019-2020 trans-Pacific contracting period.
Seabury Maritime Vice President, Nikos Petrakakos, stated about the sulphur cap:
The 2020 deadline to reduce sulfur oxide emissions is one of the most significant regulations impacting liner shipping in recent memory. With fuel costs already representing more than 50 percent of total operating expenses, the IMO 2020 poses an increase too significant for carriers to absorb and stay operational
Specifically, the shipment of a container from China to the USEC costs about $1,600. When the new regulation enters into force, this amount will increase by $600. For this reason, ship-owners should take measures and be prepared to share the risk of changing fuel prices by establishing reasonable and transparent fuel-surcharges.
However, the report finds that the shipping industry lacks a standard to compute fuel-surcharges, and is uncertain regarding the future costs of low-sulphur fuel, as today there are only rough estimates. As a matter of fact, there are numerous elements that could impact a carrier’s calculation of fuel surcharges. This makes things more complex, but it also underpins transparency as a key factor to ensure trust for all parties.
This is also what Mr. Petrakakos believes that transparency is able to drive better relationships and highlight the carriers’ attempts to achieve an enhanced fuel efficiency and lower costs. He also adds that if the shipping industry does not have clarity, carriers can experience undue blowback, due to the wrong understanding of the metrics.
Despite the increase in costs, the report urges shippers to welcome the environmental benefits that the 2020 sulphur cap will bring, while also review fuel surcharge trade factors with their carrier partners.
Nonetheless, switching to compliant fuels is only one of the options to comply. Carriers have other ways to comply as well, with one of them being the use of scrubbers. As of now, scrubber prices range between $1 million and up to $6 million for large ships. Regarding their installation on small to mid-size ships, the installation costs can be equal or even higher than the cost of the scrubber itself. This would raise the overall cost to about $2 million to $8 million per ship.
In addition, when considering all time and costs, the fuel that is consumed whilst repositioning and testing, and engineering work, the report says that the payback time for an open loop scrubber would be no more than 2 to 3 years, and about 3.5 years for a hybrid scrubber.
Concluding, the report notes that if all parties understand clearly the necessary costs for carriers to provide their services to shippers, then the benefits will be more than the negative aspects. Namely, a transparent method to calculate fuel surcharges and an understanding of how the low-sulphur fuel will affect the industry, are crucial to ensure the financial health of the supply chain.