One of the most disruptive changes to the shipping industry took effect on January 1, 2020. The International Maritime Organization, the United Nations agency responsible for shipping industry oversight, ushered in the New Year with new regulations (IMO 2020) to curb greenhouse emissions. The results will have significant impacts and costs for the shipping industry, with cascading economic effects for other industries.
Why focus on sulfur emissions from shipping?
The shipping industry is the leading producer of sulfur emissions worldwide. Burning bunker fuel accounts for almost 90% of global sulfur emissions and the 15 largest ships in the world produce more sulfur each year than all cars put together. IMO 2020 sets a worldwide 0.5% sulfur emission cap – a drastic decrease from the current 3.5% cap—to curb greenhouse emissions.
How will IMO 2020 impact the shipping industry?
Clients in the shipping industry anticipate their total fuel bill to rise by 30% – 40% through added refining costs and the increased demand for low sulfur fuel. These regulations also challenge the industry to re-evaluate freight capacity, frequency of fueling stops and vessel speed, all which affect overall profit margins.
The IMO 2020 will also create waves across multiple markets and industries – from refineries responding to the shift in product demand to potential service disruptions and increased freight rates – which eventually are passed on to the consumer. Goldman Sachs estimates full compliance with IMO 2020 could cost consumers an additional $240 billion.
How can shipping companies deal with IMO 2020?
Here are five ways shipping companies can work to comply with the new regulations:
1. Switch to low sulfur fuel
Daily bunker fuel usage in 2018 averaged at 3.5 million barrels, which is approximately 5% of the world’s total fuel demand. It’s predicted that switching to low sulfur fuel will require approximately 2.5 million barrels. Experts expect the increased demand to drive up fuel costs, with some predictions of 0.1% MGO as high as $900/mt.
2. Manage freight capacity and vessel speed
Additional refining costs, which are required for low sulfur fuel, adds to the overall fuel costs. To minimize the cost increase, shipping companies can opt to reduce speeds and total fuel consumption. However, speed reductions also increase travel times, which affects overall profit margins.
3. Make additional fueling detours
Reduced fuel weight during travel decreases emissions. A sufficient supply of low sulfur fuel is a pressing concern. Any shortages would cause inefficiencies and increase freight rates even more as vessels would be forced to detour to refuel more often. Employing fuel forecasts – price and availability – may help shipping industries optimize routes.
4. Install scrubbers
Since the regulations apply to emissions, not the fuel’s sulfur content, some shipping companies are opting to use scrubbers to ‘capture’ the sulfur before it is released. Scrubbers work by transferring the sulfur emissions from the exhaust fumes and moving them to a disposal unit. However, only an estimated 1% of vessels have been retrofitted with scrubbers, and many shipping companies are waiting to see if scrubbers prove to be effective. Alongside this, scrubbers take between 4 – 6 months to manufacture and 2 – 4 weeks to install.
5. Optimize routing for weather
Optimal routing based upon weather forecasts can help reduce fuel consumption without risking safety or efficiency. It has shown to offer fuel savings between 4- 10%, depending on the type of vessel, the season, and the conditions. While captains have to manage safety, efficiency, ETAs, speed ranges, and additional constraints, in addition to fuel consumption, weather routing can balance peak performance and reducing emissions.
IMO 2020 is a bold step toward reducing environmental pollution, but it does create new challenges for the shipping industry. Using the action steps listed, or using a combination of the steps, such as retrofitting and route optimization, will help shipping companies meet IMO 2020 regulations.