Europartners Groups joins forces and knowledge with Maersk to let you know all about IMO 2020 regulations.
The IMO 2020 regulation is the new ruling approved by the International Maritime Organization. It enforces the use of fuel oil with a maximum of 0.5% suffer m/m (mass by mass), in substitution to the currently 3.5% being used, to reduce sulphur oxide emissions.
As a global freight forwarder, we from Europartners Group invited our strategic partner Maersk –the world’s #1 ocean carrier by capacity– to join expertise and enlighten an audience about several recurrent themes related to the new Maritime International Organization (IMO) regulation.
In August 2019 we organized a webinar which became one of the most complete sources of information about the regulations regarding sulphur oxide emissions. The new rules will be valid as of January 1st, 2020. To share the knowledge gathered in the webinar, we’ve prepared this article with the main details discussed on the online presentation.
You can watch the webinar recording in our Europartners channel on Youtube (in Spanish).
“In our daily life, climate change issues are becoming more relevant than ever. The logistics industry is sharing the same worries. This is why the IMO has been working to reduce sulphur emissions,” explains Ms. Michele Lira, ocean import leader in Europartners Group.
The Marpol Convention: a solution
“The IMO intends to make the maritime industry ‘greener’; that’s why it is incorporating new regulations to reduce air contamination, reduce impacts to the open sea and shore areas, which result should be shipping more ecological. This regulation is just the beginning: the IMO has already announced its vision towards 2100: zero emissions,” comments Ms. Lira.
The hydrocarbons used as vessel fuel, derived from crude oil, contain Sulphur (SOx) which, following combustion in the engine, ends up released into the atmosphere, with other ship emissions.
Sulphur oxides (SOx) are known to be harmful to human health, causing respiratory symptoms and lung disease. But it goes beyond: in the atmosphere, SOx can lead to acid rain, which can harm crops, forests and aquatic species, and contributes to the acidification of the oceans.
Since 2005, the IMO has implemented several rules to reduce sulphur emissions, under Annex VI of the International Convention for the Prevention of Pollution from Ships (known as the MARPOL Convention), which already indicated that since the first day in 2020 all vessels, all sizes, must use the rile-determined fuel oil.
The limits on sulphur oxides have been progressively tightened, to ensure the pollution can be decreased in 80%.
“By 2020, we’ll have to diminish the level of emissions in our combustibles from 3.5% to 1%,” explains Mr. Sebastian Gomez, from Maersk commercial team.
“We’ll be facing important changes, in which we’ll be using combustibles further refined. In the regulated areas, close to populated shore areas, for instance, sulphur levels cannot be over 0.1%. Some examples are the United Stated, China and North Europe coast. In Maersk, we are working to be totally transparent with the new costs,” says Mr. Gomez.
Consequences for the logistics sector
Complying with the new regulations regarding the low sulphur content will make the industry significantly more ecological, but it will also generate a substantial impact over the costs of the services.
“The shipping companies cannot absorb the costs increase related to the new IMO regulations, so it will be transferred to the clients,” explains Europartners ocean import leader. “What we can do is sharing precise information with all the details on how the costs will be calculated, so our clients can foresee budget impacts related to ocean freight and its components. Therefore, they can better organize their transportation projections and the direct cost increase over their products prices,” she adds.
Combustible prices in 2020 remain significatively uncertain. Nevertheless, prices must face a high raise after the criteria for emissions become stricter since, therefore, it will generate the need to increase refining capacities and to sophisticate the refining techniques used on marine combustibles.
Measures to be applied by the shipping companies
Most of the global fleet is expected to comply with the new regulation as of January 1st, 2020. Overall, the shipping companies are working on three alternatives:
- Using some sort of compatible fuel oil, with sulphur content lower than 0.50%
- If the frequently-used fuel oil exceeds 0.50%, finding an equivalent or, for instance, installing scrubbers, exhaust fumes cleaning systems
- Using an alternative combustible. Eg.: Liquified natural gas (LNG) or methanol
In any case costs will rise, since both compatible fuels and investments in new technologies are quite expensive.
Fuel Oil LSFO
The strategy developed by most shipping companies considers adopting low suffer fuel oil (LSFO). Important features to be considered regarding this measure are:
- It’s the most ecological solution found so far
- The fuel price is higher
- The operational costs are increased
- It’s not available everywhere yet
The total cost that must impact the ocean freight industry is still unsure. Some external sources estimate that additional costs could reach up to USD 15 billion, but the German-based containers and ocean freight company Hapag-Lloyd informs it could reach USD 60 billion.
The first shipping companies to make the impact of costs public were Hapag-Lloyd and our invited guest for this webinar, Maersk. For the latest, the cost impact to comply with the new measures could reach over USD 2 billion/year, while Hapag-Lloyd states that the impact over the three first years of the regulation could be USD 1 billion, based on the assumption that the LSFO 0.5% maintains its prices between USD 250 and USD 300.
Companies like Shell have shared information about how they are organizing for 2020 and the products they have developed specially for ocean freight companies, such as the marine gasoil (MGO), very low sulphur fuel oil (VLSFO), fuel supply on key ports, high sulphur fuel oil supply for vessels with on-board scrubbers and liquefied natural gas.
These companies are already conducting fuel 0.50% tests in cooperation with the shipping companies, for clarifying doubts and assess the compatibility and the possibility to handle these product options.
“It is expected that most of the vessels –around 90% of the global fleet– will be operating with LSFO on January 1st, because it is the most economic and practical measure to accomplish complying with the regulations in such short notice,” comments Ms. Lira.
In November 2019, Europartners Group sent our clients the price updates of some shipping companies.
Part of the second alternative the shipping companies are adopting to comply with the 2020 regulations, scrubbers are just a provisional measure.
Some peculiarities of this alternative are:
- It demands less investments. Nevertheless:
- It consumes more combustible.
- It increases CO2 emissions.
- It increases water pollution.
Shipping companies such as MSC, One and Maersk are investing high to install scrubbers to some of their vessels, that serve some of their routes and regions.
Hapag-Lloyd has informed that installing a scrubber costs between USD 7 million and USD 10 million per vessel, and their investments on scrubbers would also be limited.
As a marine fuel, liquefied natural gas (LNG) is expanding world-wide as the bunkers are expanding as well, and the segment of the vessels fueled with GNL is increasing.
GNL fuel supply key-locations are being developed to serve the growing number of clients. GNL fuels are clean and cost-competitive. The downsides are the lack of enough infrastructure and the necessity for high investments.
Hapag-Lloyd informed that turning a big vessel into LNG-fed costs between USD 25 million and USD 30 million. Therefore, only a small part of their float will be LNG, and they’ll be new vessels. Hamburg Sud has announced that only new vessels will be LNG, and only a limited part. In its social network channels, CMA CGM shows that, by now, it only has three LNG vessels in its float.
Europartners Group Commitment
Complying with the regulations will result in significative benefits for the environment and the human health, reducing sulphur emissions contamination by 80%.
“Even with the new regulations, containers remain the most cost-competitive modality for shipping goods, once the transportation price represents only a small fraction of the cost payed by the consumers,” clarifies Ms. Lira. “We, at Europartners Group, will be transparent with the fuel cost estimations, using all the mechanisms that are being developed by the shipping lines,” she reveals.
In Europartners Group, we keep committed to inform you about the changes in the industry.
For the new ways to estimate fees, Maersk is considering two different scenarios:
- Long-term contracts
- Freight rate
- Bunker Adjustment Factor (BAF)*
- Low Sulphur Surcharge (LSS) on Emission Control Areas (ECA)
- Short-term contracts (6-months top) and SPOT movements:
- Freight rate
- Environmental Fuel Fee (EFF)
- Low Sulphur Surcharge (LSS) on Emission Control Areas (ECA)
* Implemented in 2019, the BAF will be reviewed on 2020, based on the average fuel prices.
Watch the complete webinar video (in Spanish) to see a graphic description on how each factor will impact Maersk prices and the changes to the BAF calculation.
Basically, the BAF is calculated by multiplying the average fuel price by a trade factor.
In other hand, to calculate the trade factor, we must divide:
- The consumption of the total of combustible (in tons)
- The total of containers transported during a year
And then multiplying the result by:
- The imbalance.
“The imbalance is the relation between volumes in a determined commercial route,” explain Mr. Sebastian Gomez, from Maersk. It is the segment of the commercial route with the lowest container volumes versus the segment with the highest volumes. “It is essentially assessing the import versus de export among the different ocean freight routes we handle,” clarifies Mr. Gomez.
There are three imbalance levels:
- Balanced routes
- Unbalanced routes
- Very unbalanced routes
“For instance, from the Americas’ Pacific Coast to Asia, we know that Asia imports prevail over the Pacific Coast exports. As to say, we import more from China than we export from Mexico. This is what we call an ‘unbalanced route’,” describes Mr. Gomez.
To see a numeric example, watch the webinar video (in Spanish).
“Nowadays, Maersk float, for example, on Asia-LATAM routes, travels with two fuel tanks; one of which carries 0.1% sulphur fuel and the other, the 3.5% component. Basically, to comply with the IMO regulation, Maersk will no longer use the 3.5% fuel and will evolve to the 0.5% sulphur fuel, which is more refined, as we have mentioned before,” emphasizes Mr. Mauricio Molano, Maersk commercial manager, about the costs increase.
Mr. Gomez highlighted the importance of also contemplating the fuel prices updates, which also impact on the BAF. Prices used to be updated every quarter of the year, but now revisions will take place every month, especially due to the fuel chance related to the new regulations.
Mr. Molano clarifies that companies may be able to forecast prices, but no one knows how much the 0.5% sulphur fuel will cost in 2020, since the oil-producing companies haven’t confirmed their prices yet.
During the webinar, Mr. Gomez informed the audience that, if during Maersk price-update procedures, they identify an average fuel price variation –up or down– around USD 10, changes will be made. If the variation is lower than that, the BAF will be kept the same.
Environmental Fuel Fee (EFF)
Mr. Molano affirmed that “probably, starting on December 2019, a new charge called EFF will be adopted. It intends, precisely, to capture the delta from changing from a cheaper fuel (the 3.5% sulphur one) to a more refined one, the 0.5%.” This price difference was already reflected on the longer-term contracts, due to the BAF.
Mr. Gomez reiterated that clients will always be informed of the precise updates.
The cost of the first EFF to be applied will be calculated from the result of the different between the BAF on Q1 2020 and the BAF on Q4 2019.
Maersk informs that will only change the EFF rates when the fuel prices chances over USD 50/ton, compared to the previous quarter.
Do you have any doubts about cargo ocean freight services? Or in other modalities? There’s always an Europartner Talent available to make your global dreams a reality. Contact us!
With information from the IMO.