IMO 2020 Low-sulphur Regulations

Next year will be a pivotal year for the container shipping market, with the imminent the IMO 2020 low-sulphur fuel deadline set to trigger more slow steaming and transhipment – and be potentially disastrous for some container lines if they fail to recover enough of their cost increases from customers, according to industry analyst Drewry.

Drewry Supply Chain Advisors’ February whitepaper ‘IMO 2020 Low-sulphur Regulations’ offered some pointers to shippers regarding the new fuel regulation to use in their contract discussions with carriers, and previously launched an ‘IMO 2020 Cost Impact Calculator’ to assess the ramifications, with Drewry noting: “From what we hear, there is a general acceptance among shippers that they will have to pay more towards the fuel cost burden, although there are still a number of sticking points regarding the mechanics of how it should be done.

“On the other side of the table, carriers will argue that a short-term win for shippers could quickly turn into a loss. It is something that shippers might want to consider during negotiations as any cost saving today might raise the likelihood of another carrier bankruptcy in the manner of Hanjin Shipping, causing unwanted chaos in the supply chain and further reducing the competition, thus increasing the risk of much higher rates at a later date.”

Drewry said the reality was that carriers’ fuel costs will start to differ to a considerable degree as the new fuels are pumped into their ships, with the variance to be largely driven by the type of fuel used. It highlighted a new report by the International Energy Agency (IEA) that suggests marine gasoil (MGO) will be the preferred option for shipowners across all maritime sectors from next year when the new 0.5% sulphur limit becomes law. Use of very low-sulphur fuel (VLSFO), which is expected to be cheaper at the outset, will gradually become more popular as concerns over the availability of blending materials dissipate, Drewry indicated.

“Depending on their success in raising the fuel recovery rate, carriers will inevitably seek to mitigate the anticipated higher operating expenses. One potential side-effect from the new regulations could be greater slow-steaming and use of transhipment – the logic being that as ships sailing speed is reduced and round voyages are extended carrier s will drop ports from rotations to ensure that transit times to key points remain competitive.

It concluded: “Shippers rightfully want more transparency regarding how the new fuel surcharge mechanisms will work, but they should be mindful of the potential risks to future service options, competition and rates if they don’t concede anything to carriers.”