IMO 2020’s impact on ocean shipping

HIGH POINT — Furniture shippers should brace for increased costs and impacts on delivery times in 2020 as IMO 2020’s requirements to reduce sulfur emissions from ocean vessels go into effect Jan. 1.

That’s the International Maritime Organization’s deadline for the global shipping fleet to switch from 3.5% sulfur fuel content to more expensive fuel that’s 0.5% sulfur content by weight. Carriers also have the option of continuing to use high-sulfur fuel after installing exhaust scrubbers, or they can convert to alternative fuels such as liquefied natural gas.

Whatever the lines’ choice or combination thereof, shipments from Asia starting in the New Year will likely cost $150 to $400 more per container, depending on West Coast or East Coast destinations.

A weak market for ocean shipping of late has kept a number of carriers from instituting price increases ahead of time to offset more expensive fuel or scrubber installation ahead of time, according to Garrett Bowman, president of Gulfstream Shippers Assn., who said that will change, perhaps as early as this month.

“To be compliant by Jan. 1, (carriers) have to ramp up in switching fuels or installing scrubbers, and that could lead to possible addition charges in December on the spot market,” Bowman said. The real change will come with the New Year, and it’s hard to predict the exact increase.

“Each carrier is proposing a different equation for the cost,” Bowman continued. “Your fuel costs will be different depending on how many carriers you use. Everyone’s using a different calculation, and it can vary by line or the freight forwarders you use. It will be an interesting dynamic to see how this all plays out.”

Looking into 2020, Peter Giorgio Jr., president of Global Logistics Solutions LLC and founding partner of Advantage Shippers Assn., which focuses on ocean and drayage rates for shippers, has seen carrier estimates of IMO 2020-related fuel surcharges ranging from $200 to $400 per container for the shipper.

“Additional increases could also be felt on diesel pricing for truck transportation costs, also contributing to higher supply chain costs,” Giorgio said. “Overall shippers will need to plan for a sustained impact of this surcharge for at least all of 2020. As long as there is a visible difference in price between LS and HS fuels then the carriers will be able to maintain the surcharge environment.”

Larry Cryan, vice president of operations at Samson Marketing, hasn’t noticed service or space issues yet, even though some ships have been taken out of service for the installation of scrubbers. He expects the cost issue to resolve over the next few weeks and that all Samson’s carriers will present final numbers 30 days in advance a Jan. 1 effective date.

“I would expect the fuel component to be a major point of discussion in contract negotiations next spring,” Cryan added. “Their operating costs will be increased, and I’m sure they’ll be doing their best to pass that along. Operating costs will vary to a degree from carrier to carrier based on how aggressive they were as far as installing scrubbers as opposed to just paying the higher cost of the LS fuel.”

Looking at 2020

What’s the outlook on the near- and long-term availability and cost of LS marine fuels, and the impact of that on ocean shipping?

Jessica Lonsdale, marketing manager at CV International, said her research indicates that while carriers are working hard on IMO 2020, compliance, the demand for LS fuels will be massive, and analysts aren’t so confident in immediate accessibility.

“I would infer that availability will become more likely only after refineries increase capacity of compliant fuel and after vessels investing in scrubber systems return to the water, revealing a more consistent and more predictable (high-sulfur fuel oil) demand,” she said. “The current challenge, which has been the same over the past couple years, is overcoming hesitation about how to proceed with compliance.

“Refiners will watch carriers’ decisions to decide if they should invest in increasing LSFO capacity or if vessels will view scrubbers as the more favorable option and continue to require HSFO.”

Bowman believes low-sulfur fuel will be in relatively short supply in the near term, especially as ocean carriers are still deciding whether to completely switch to the newer fuel or install scrubbers, which can take months and cost several millions of dollars per vessel.

“My opinion (is) it will be a supply-and-demand issue,” he said. “LS fuel is more expensive and labor-intensive to manufacturer. A lot of refineries will run HS fuel because it’s always going to be in demand (since) a lot of steamship lines are putting in scrubbers. It’s expensive up front; they’re leveraging the investment relative to what they see in long-term fuel costs.”
Bowman believes refineries will produce the HS fuels longer due to the cost of manufacturing the LS fuels until they have to produce the LS fuels going into 2020.

“Over time, the supply of LS fuel will increase,” Bowman said.

Cryan sees the price spread between HS and LS fuels growing, which has influenced more carriers to be more aggressive in installing scrubbers.

“I’m still reading that there are concerns that there won’t be an adequate supply of LS fuel to meet initial demand especially at smaller ports,” he added.

Scrub or switch

The decision on carriers’ part whether to install scrubbers or switch fuels has implications on how pricing and capacity play out. Both options have associated costs.

“Carriers seem to have switched gears a bit in terms of becoming more aggressive in making the determination that installing scrubbers was a better strategy,” Cryan said. “It’s a multi -million dollar investment in each vessel, so it’s a risk they’ve deemed worth taking given the price spread in the high sulfur/low sulfur fuel.”

With a high premium on LS fuel, Lonsdale said scrubbers have been an attractive option.

“Scrubber installation volume more than doubled from 1,600 in September 2018, to about 3,700 in September 2019,” she said. “Initially, the price of high-sulfur fuel oil is expected to decline sharply after 2020, while the price of LSFO will remain high.
“There is uncertainty about how great the premium of LSFO will be, but it is expected that the premium of HSFO will be robust enough to recuperate the price of scrubbers within the first couple of years. We should expect to see LSFO continuing to be a costly compliance option throughout at least the next year.”

In addition to avoiding the LS premium, scrubbers can offset any shortages of LS fuels, especially in the near term as refineries weigh their options.

“After the industry settles back down and refinery capacity increases, the vessel can then switch over to LSFO if it becomes the more economical option,” Lonsdale said.

Giorgio pointed out that while the new standards didn’t take anyone by surprise, he and others would have thought more ships would have been retrofitted with scrubbers by now.

“It’s hard to believe the standards were announced in 2016, and here we are almost to 2020, and a recent article in the Alphaliner Weekly indicated only about 6% of the fleet worldwide has been fitted with scrubbers,” he said. “The pace for retrofitting is significantly increasing but overall will be a low percentage, meaning a majority of vessels in short term will be utilizing the low sulfur, which in turn will strain supply and increase LS costs.”

In addition to their installation cost, scrubbers also create space issues on vessels.

“They take as much as four containers of space,” Bowman noted. “Also, since scrubbers clean exhaust, you have to capture that and store it. You have up to a full container of sludge, and that has to go somewhere.”

Giorgio pointed out that conversion of ships for use of LS fuels has a time impact as well more expensive fuel cost.

“At issue, per my understanding, is that to utilize the low sulfur a ship must be flushed and cleaned before utilizing the LS fuel, which can take up to a week to perform per ship to maximize the cleanliness from HS residue,” he said. “There are quicker cleaning methods, but it is unknown how effective they would be and what impact the end measurement of sulfur content would be when switching to LS after using HS in the tanks.

“That means potentially over the next 30 to 45 days many ships could be pulled from rotation for the complete and most impactful flushing service activity.”

With peak season and Chinese New Year looming, shippers can expect more pressure on capacity that could lead to higher base rates than typical for similar periods in other years.

“Add to that scenario the LS surcharge, and landed costs are going to have a real impact to shippers’ bottom line,” Giorgio said.

Service issues

Giorgio expects increased blank sailings as both scrubber installations and flushing to accommodate LS fuels ramp up over the next 30 to 45 days.

“Certainly additional strain on capacity will be a result and thus further potential price increases on ocean base prices,” he noted.

Bowman also believes compliance with IMO regulations will likely increase the number of blank sailings.

“A lot of lines are coming down to the end of the year, and I imagine there will continue to be blank sailings until those scrubbers are installed,” Bowman said. “There’s a backlog on parts and manufacturing, and this affects other ocean industries like cruise ships as well.”

Another potential impact on shipping times: slower sailing for those ships converting to LS fuel.

“The carriers may reduce speed to burn less fuel to combat the increased cost,” Bowman said. “It’s up to the lines, but they’ll probably try to burn less fuel.”

On the other hand, carrier utilization of blank sailing in the past couple of years to manipulate supply in the market and maintain higher rate levels is nothing new.

“Vessels taken offline for scrubber installation are unlikely to have a significant impact to market capacity given the current familiarity of blank sailings,” noted CV International Director of Pricing and Procurement Rachel Shames.

With so much variance among ocean carriers regarding pricing equations and scrubbers vs. LS fuel conversion, shippers should pay extra attention to their ocean-freight paperwork.

“It’s important to be aware of invoicing in the coming months, especially since various ocean carriers are handling IMO compliance costs differently,” Bowman said. “There will be some issues of errors or discrepancies in invoices from carriers.”