What will be the impact of low sulphur fuel oil (LSFO) on international shipping?

January 2020 sees the start of an important global initiative to introduce low sulphur fuel oil (LSFO) for international shipping. This purpose of this is to lessen impact on the environment. It is the the greatest change thus far to how the shipping industry is being regulated. It will have deep and wide-ranging effects on all aspects of marine transportation.

What will be the impact of low sulphur fuel oil on international shipping?What will be the impact of low sulphur fuel oil on international shipping?

What does low sulphur fuel oil mean?

The changes being implemented require fuel oil for shipping purposes to be limited to less than 0.50% sulphur content. This is a major change from the sulphur content cap of 3.50% set on 1 January 2012. The term ‘fuel oil for shipping purposes’ covers oil utilized in all engines and boilers on ships, whether main or auxiliary.

Other ways in which vessels can achieve the mandatory reduced sulphur content levels include utilizing Exhaust Gas Cleaning Systems (EGCS). These remove particulate matter and harmful components from marine engine exhaust gases before they are released into the atmosphere.

Low sulphur fuel oil will add cost to international shipping

Due to the higher price of low sulphur fuel oil or having to install EGCS, shipping companies will be paying more for their fuel.. There is no alternative, because the 0.5% sulphur limit set by the Emission Control Areas (ECA) is mandatory and immutable for all, across the board.
The International Maritime Organization (IMO) limits on sulphur content in marine fuel oil are being implemented in 2020. It is expected there will be a cost increase of approximately 25% and an additional $24 billion in expenses.

With the cut-off date for the reduced sulphur content looming, how ready are the industries that rely on marine fuel oil? It would appear they are not. This raises concerns for the shipping industry and the more than 90% of all industries that depend on it for transportation of goods by sea. How will these be affected over what may be a lengthy period.
So how will capacity and freight rates be impacted by the IMO 2020 regulations?

What will be the impact of low sulphur fuel oil on international shipping?Low sulphur fuel oil will add cost to international shipping

Implementation requires huge effort

In 2017, the shipping industry used approximately 3.8 million barrels of oil. Most of this was HSFO (high sulphur fuel oil) that emitted between 1 and 3.5% sulphur when used for shipping. This equated with 50% of total usage worldwide. The maritime sector will need to make a huge effort in order to achieve the mandated 0.5% sulphur target.

Most shipping operators and cargo ship owners have concerns. Can they recoup the expenses involved in achieving the IMO 2020 stringently reduced SOx level? For a large percentage there is confusion about how the new regulatory system will operate. Many ask the same question, i.e. “What compliance alternatives are there?”

No practical alternative fuels

The simplest way forward is for shipping companies to change to LFSO or LSD fuels. In anticipation of this, major fuel refineries such as ExxonMobil are gearing up to produce large amounts of these products.

Shipping companies might prefer not to switch from HSFO. They may choose to use Exhaust Gas Cleaning Systems (EGCS) to ensure sulphur is not released into the atmosphere. Industry leader Maersk is opting for this method. They intend to install scrubbers on their ships by January 2020, to meet the deadline.

Another alternative is the use of LNG or methanol. Supplies of these fuels are, however, insufficient to meet the projected need. Indeed, it is considered that, by 2040, there would only be sufficient LNG for 10% of the requirement.

Benefits to clean fuel producers

The majority of marine shipping companies are likely to face paying more for oil fuel. Refineries able to process LSFO, however, are ideally placed to benefit greatly from the new requirement. In China and the US, highly evolved methods allow oil refining companies to manufacture low-SOx fuel.

In the US, Gulf Coast oil refineries expect to gain major fiscal benefits from the anticipated requirement for LSFO. Major European oil companies such as Repsol SA, Pic and BP, are gearing up ahead of the deadline. They need to ensure they are ready to produce sufficient LSFO to fill the orders expected at changeover.

Low sulphur fuel oil will not affect international shipping capacity

It is expected that there will be little, if any, change in shipping volume once the new regulation cuts in. Some companies, however, may experience some reduction in shipping volume as they work to meet the requirements of the new regulations.

As there are limited supplies of LSFO and the expense associated with moving to a LNG operation is considerable. There will, therefore, likely be an increase in shipping companies installing scrubbers to ensure they meet the IMO 2020 requirements.

The IMO 2020 rule could potentially bring about an increase in the ordering of new ships. These will be built to meet the new world order of environmental protection. These ships would be 30% more energy-efficient and would provide necessary extra shipping cubage.

Low sulphur fuel oil will increase shipping freight rates

It is expected that cubage will not change greatly, but shipping prices will certainly increase. Complying with the changed regulations on low SOx will add around $24 billion to the shipping industry’s bottom line. This, once the new regulations are in effect, could potentially add $1 million to the cost of an Asia-North Europe return journey.

It must be recognized that the anticipated increase in shipping transportation costs is coming immediately after the moves to increase charges for bunkerage. This push came from leading shipping companies such as CGM, MSC, Maersk and CGM. There was a rise in bunkerage costs during 2018’s summer. This points up how unready and ill-prepared the marine transportation operators are for increasing oil prices.

The LSFO level change is affecting huge changes in the marine sector overall. There are a number of variables to take into account. Additional bottom line costs relative to new equipment such as scrubbers need to be considered. Another consideration is how ill-prepared industry players are and the anticipated paucity of LSFO. It is impossible at this point to foresee how shipping freight costings will change. However, it is clear that they will increase. We just can’t tell by how much.

Low sulphur fuel oil will add cost to international shippingLow sulphur fuel oil will add cost to international shipping

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