The International Maritime Organization (IMO) is the UN agency responsible for ensuring the shipping industry is clean, secure, safe, and efficient. As part of its remit, IMO introduced new regulations to combat the impact of sulfur emissions released by global shipping. From 1 January 2020, a new worldwide 0.5% sulfur emission cap came into force, down from the previous 3.5 % cap.
Why focus on sulfur emissions from shipping?
The shipping industry was 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.
How is the shipping industry responding to IMO 2020?
While the regulation impacts the whole industry, the priorities and challenges of specific sectors mean that they’re adapting in unique ways. Here is how IMO 2020 is affecting different parts of the industry.
Container market balancing impact by passing costs onto customers and retrofitting vessels with scrubbers
In the container market, operators are diversifying routes to compliance. CMA CGM, for example, is using a combination of options to meet the regulation, including using LNG in 20 of its ships by 2022, ordering several scrubbers for its vessels, and using LSFO for the rest of its fleet.
Many operators, including CMA CGM, ONE, OOCL, APL, and Hapag-Lloyd have introduced additional surcharges and levies to customers to manage the impact of additional charges.
The containers ship market had initially been skeptical about adding scrubbers. But with average prices falling from between $5million – $8million to $3million – $5million, the economic balance has tilted towards favoring scrubbers.
However, the container sector’s heavy reliance on the Chinese market means it has fallen victim to the shutdowns triggered by COVID-19. International economic activity and demand are down across the world, impacting containers through supply chain disruption.
Dry cargo market feels the financial impact of IMO 2020
Increased freight costs combined with decreased demand – related to both the seasonal slump caused by Chinese New Year and swiftly followed by the impact of COVID-19 – mean margins for owners are low. The dry cargo market is in a fragile state.
The relatively small value of cargo magnifies this challenge compared to other shipping sectors. While an oil tanker may carry £130 million in crude oil, the equivalent iron ore cargo could be worth only $15 million.
In many ways, what has unfolded at the start of 2020 in the dry bulk market shows the rest of the industry what happens if IMO 2020 implementation collides with weak demand.
Based on these tight margins, it’s likely that dry cargo vessels installed with scrubbers will benefit financially, as they’re able to use the cheaper HSFO. Estimates suggest between 15% – 20% of ships in the market are installed with scrubbers.
Tanker market benefits from new fuel demand around the world
Preparations for IMO 2020 gave the oil tanker market a significant boost. The growth in demand for LSFO and VLSFO during Q4 2019 from ports getting supplies in place for 1 January, has benefitted the market.
TORM, for example, reported the strongest start to a year in more than a decade, which has been achieved despite uncertainty caused by COVID-19.
In January, reports revealed that supertankers hauling 2 million barrels earned about $20,000 more a day if fitted with scrubbers. Though, as the price difference between HSFO and LSFO decreases, this margin will reduce.
As well, the economic downturn caused by COVID-19 is creating a glut of oil reserves, as supply exceeds demand. Supertankers have been drafted in by oil traders to store these additional supplies, as existing facilities are already full. While benefiting the tanker market in the short term, if demand remains low, it could impact the tanker market later this year.
Managing fuel consumption is essential across all sectors
Underlying the impact across all sectors is one factor: shipping companies must control fuel costs to maximize margin and limit the overall effects of IMO 2020 on profitability, while also remaining compliant. It’s a tough challenge, especially with the unprecedented uncertainties caused by COVID-19.
Many shipping companies are using accurate weather routing to support their overall approach to IMO 2020 compliance. Weather routing helps to optimize fuel consumption and improve operational efficiency, essential to face the challenges IMO 2020 presents.