It may not surprise readers to hear that the upcoming Sulphur 2020 emissions regulation has been welcomed by industry, regulators and environmental champions alike. Intended to dramatically reduce the sector’s sulphur emissions, it will deliver great environmental and health benefits – particularly for those living near coastlines and ports – and in doing so, reduce the impact on wider society. But it’s also widely acknowledged that the regulation will have significant consequences for both ship owners and their customers.
In 2020 a new regulation for a 0.50% global sulphur cap for marine fuels will come into force. Under the new global cap, all ships will have to use fuel on board with a sulphur content of no more than 0.50% against the current limit of 3.50% in an effort to reduce the amount of sulphur oxide. The interpretation of “fuel oil used on board” includes fuel used in main and auxiliary engines and boilers. The Emission Control Areas (ECAs) will remain at the 2015 standard of 0.1% content.
The responsibility to comply with the IMO regulation will fall to the shipping companies. They’ll need to ensure their fleets meet the sulphur requirement in one of three possible ways:
Most ships in the industry are expected to go with the first option, and only a handful will use LNG. By the end of the year, up to 2,000 ships may be retrofitted with scrubbers, according to market estimates — far less than IMO’s prediction that 3,800 vessels would have scrubbers. That’s not a lot when you consider there are about 100,000 ships floating around worldwide at the moment.
Looking at Wagenborg’s fleet, it is quite representative for the industry. The vast majority of Wagenborg’s ships will be running on VLSFO as of 1 January. The only exceptions are RORO carriers Bothniaborg and Balticborg, which have been equipped with scrubbers.
VLSFO is the most logical choice since it does not require making technical changes to existing vessels. Also, the price differential between VLSFO and MGO will encourage the use of this blended fuel, and its availability will not be a problem. A scrubber installation, on the other hand, costs up to several million per ship, which explains the low number of vessels taking this route. Also, the future availability of HFO380 is uncertain as new types of fuel will become the standard then. Many carriers have decided to scrap older ships rather than retrofit them.
Fuel prices will play a significant role in the rise of shipping rates, as a substantial part of a ship’s operating cost is fuel. As a result, freight rates will also increase. By how much exactly will be dictated by the supply and demand of the new types of fuel. Once the IMO regulation is in effect, low-sulphur fuel will be in high demand and tight supply. The refining industry will have to alter its current product slate and increase the supply of low-sulphur fuels, including blended fuels.
While cargo-owners don’t need to make any changes to their cargo or booking process, they do need to prepare for the inevitable price hikes. Wagenborg believes it is important to be in dialogue with its customers. It is crucial to be as open and transparent as possible, because the long-running issue for cargo-owners is that, in many cases, they believe these price hikes are merely revenue generating add-ons rather than justifiable cost recovery measures. That is why Wagenborg is happy to answer questions about how we calculate bunker surcharges or bunker adjustment factors.