IMO 2020: How Will New Regulation Impact the Shipping Industry
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 is introducing 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 will be in place - down from the current 3.5 % cap.
Why focus on sulfur emissions from shipping?
The shipping industry is currently 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 IMO 2020 likely to impact the shipping industry?
IMO 2020 is one of the most dramatic fuel regulation changes ever. As a result, it’s expected that fuel costs will increase and lead to rising freight rates. Clients in the shipping industry expect their total fuel bill to rise by 30% – 40%. These costs are expected to be passed onto consumers. Goldman Sachs has estimated full compliance with IMO 2020 could impact consumers by approximately $240 billion. As a result of these expected cost rises, efficiency gains from optimized weather routing will become even more important.
How can shipping companies prepare for IMO 2020?
As 1 January 2020 looms, shipping companies have to decide how best to manage the impact of the regulations. There are four main courses of action that they can choose:
Making the 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. As a result of switching to low sulfur fuel, it’s expected that approximately 2.5 million barrels of low sulfur fuel will be required. The demand increase is expected to drive up fuel costs. While we can’t know for sure what the cost of fuel will be next year, some predictions put the cost of 0.1% MGO as high as $900/mt.
Advantages: Positive environmental impact and ensures compliance with IMO 2020
Disadvantages: Fuel costs increase
Impacts on freight capacity - and vessel speed
Added refining costs required for low sulfur fuel add to the overall fuel costs. To minimize the impact of this cost increase, shipping companies can opt to reduce speeds and reduce total fuel consumption. However, speed reductions also increase travel times, which can impact on overall profit margins.
Advantages: Reduces sulfur emissions and overall fuel consumption
Disadvantages: Can impact on profit margins, due to increased travel times
Making additional fueling detours
A sufficient supply of low sulfur fuel is a pressing concern. Any shortages would result in cause inefficiencies and increase freight rates even more, as vessels would be forced to detour to refuel more often.
Advantages: Reduced fuel weight during travel
Disadvantages: Additional time required to accommodate extra fueling stops
Importantly, with regards to the regulations, it is the emissions that are regulated - not the actual sulfur content of the fuel itself. Instead of using more expensive low sulfur fuel, 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.
Advantages: Expected to deliver ROI over 2 - 4 years and comply with IMO 2020 regulations
Disadvantages: Upfront investment is required and ships are not available while being retrofitted
Discover how you can turn these changes into opportunities.
Watch the webinar THE BIG CHANGE and the Pursuit of Sustainable Shipping to find out more.