IMO 2020

What is IMO 2020?

Shipping is the foundation of the global economy, with more than 90% of trade carried via the sea. The industry’s regulator, The International Maritime Organization (IMO), states that it is, “by far the most cost-effective way to move en masse goods and raw materials around the world.”

It is also one of the world’s most significant contributors to the world’s pollution. Nearly 2 billion barrels of heavy fuels, usually banned or heavily regulated onshore, were burnt by the 90,000 ships that sailed the world last year.

In October 2016, the IMO announced a new regulation aimed at reducing greenhouse gas emissions to protect public health and the environment.

You can read their 2014 study on Greenhouse Gas here.

IMO 2020 is the term used to describe the implementation of the Regulations to Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL). It will see all ships operating in the open sea outside of designated Emission Control Areas (ECAS) reduce the levels of sulphur in their fuels from 3.5% (current limit) to 0.5% or lower.

The IMO said that the ban on high sulphur fuels (HSFO) will, “significantly reduce the amount of sulphur oxides emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”

What are the effects of IMO 2020?

Carriers can comply with the new regulation in one of three ways:

  • They can use Very Low Sulphur Fuel (VLSFO)
  • they can add exhaust gas cleaning systems (EGCS) known as “scrubbers” to their vessels
  • or they can switch to non-fuel oil alternatives such as liquefied natural gas (LNG)

This will have significant repercussions on the pricing of both VLSFO and HSFO and the costs of implementing a scrubber or securing new vessels that can use alternative fuels are also steep.

As a result, freight rates could increase as early as the end of the third quarter of 2019 and there have been concerns over the availability of compliant fuels, particularly outside main shipping corridors.

Some shipping lines have already prepared for this, including Maersk, that secured very low-sulphur bunkers at Europe’s largest container gateway.

The agreement with Koole Terminals at the Port of Rotterdam will meet 5-10% of its annual fuel demand.

This is the second arrangement Maersk have secured following a deal earlier this year with a US refiner.

How will this impact charges?

Maersk have introduced changes to their Bunker Adjustment Factor (BAF) and introduced a new Environment Fuel Fee (EFF).

BAF is designed to adjust contract rates based on fluctuations in fuel-related costs and applies to contracts with validity longer than 3 months. From January 1, the BAF tariff will be calculated based on the fuel price for 0.1% sulphur gasoil with a fixed deduction of 50 USD/ton.

Their new Environmental Fuel Fee, effective from December 16 2019, will apply to all spot business and contracts with validity up to 3 months.

Cosco Shipping also signed a low-sulphur supply contract in March with Double Rich Limited, a subsidiary of China Marine Bunker.

Cosco shipping lines will be adopting a different fuel surcharge pattern from December 1st 2019, to help compensate for the rising fuel cost.

Their BUC (Bunker Charge) applies to long-term contracts over 3 months, while their FAF (Fuel Adjustment fee) applies to short-term contracts of less than 3 months.

These charges are to be reviewed monthly and will apply to all general cargo between Asia and North West Europe/ Mediterranean.

What to expect

The US Energy Information Administration (EIA) said, “although large bunkering ports, such as Singapore, Fujairah … and Rotterdam … are likely to have both IMO-compliant fuels and non-compliant fuels, smaller ports and the vessels that visit them may have difficulties.”

Energy news and pricing outlet Argus explained in a blog post that once supply increases, bunker sellers will increase their storage of compliant fuels. The price spread between HSFO and VLSFO will be at its widest in the early stages of next year but as vessels with scrubbers go online and ship owners get used to operating in the new fuel environment, it will narrow back down.

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