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The following article provides an overview of what’s happening leading up to the IMO 2020 regs on low sulphur fuel and the implications for global trade and for freight forwarders.
By Ken Mark
Everyone talks about improving the air we breathe. Now the International Maritime Organization (IMO) is doing something about it by reducing sulphur oxides (SOx) emissions from ships. The limits have been tightened since 2005. But starting January 1, 2020, the limit for sulphur in fuel oil used on board ships operating outside designated emission control areas will be reduced to 0.50% m/m (mass by mass). While it will significantly reduce the amount of sulphur oxides emanating from ships and have major health and environmental benefits for the world, especially particularly for people living close to ports and coasts, it will increase the operating costs for ships since the price of bunker oil will increase, not to mention expenses related to updating engines and other related machinery as well as staff training to meet the new the new rules.
There is no simple answer on how the IMO’s decision will affect the shipping market. That will depend on basic issues including shipping demand for various products and commodities, what methods carriers choose to update equipment to meet the new acceptable lower sulphur dioxide levels and market price changes for the new, improved fuel which reflects the price of crude oil in a world facing political, economic and other challenges.
Here is a roundup of what global shipping executives, consultants, journalists and other experts are saying:
The main type of “bunker” oil for ships is heavy fuel oil, derived as a residue from crude oil distillation. Crude oil contains sulphur which, following combustion in the engine, ends up in ship emissions. Sulphur oxides (SOx) are known to be harmful to human health, causing respiratory symptoms and lung disease. In the atmosphere, SOx can lead to acid rain, which can harm crops, forests and aquatic species, and contributes to the acidification of the oceans.
Limiting SOx emissions from ships will improve air quality and protects the environment.
IMO regulations to reduce sulphur oxides (SOx) emissions from ships first came into force in 2005, under Annex VI of the International Convention for the Prevention of Pollution from Ships (known as the MARPOL Convention). Since then, the limits on sulphur oxides have been progressively tightened.
Beginning on 1 January 2020, all vessels worldwide must will be able to refuel using only fuel with a maximum sulphur content of 0.5 percent. On March 1, vessels will not be permitted to have on board any fuel with a high sulphur content. Only ships with exhaust gas cleaning systems will be exempt. To be compliant in time and to consume their remaining heavy fuel oil in time, shipping companies are making various changes which are both expensive and time-consuming.
Transitioning from fuel with a sulphur content of 3.5 percent to low-sulphur fuel oil will be a complex task. “It’s not about simply flipping a switch at the turn of the year, as every single ship will have to be closely examined to determine the best possible type of change depending on its design,” says Richard von Berlepsch, Managing Director Fleet Management at Hapag-Lloyd.
The challenge is that heavy and low-sulphur fuel oil are not always compatible. For example, if one simply refuelled with low-sulphur fuel oil, the two fuels could react with each other or worse, solidify. Consequently, fuel lines and filters would be clogged and the engine system would fail. So, before switching fuel types, the tanks must be cleaned and the pipes flushed. But in terms of time and – above all – money, it isn’t feasible to send every ship into dry dock to do so.
Jeremy Nixon, chief executive officer of Ocean Network Express predicts that by January 1 next year, only around 6-7 percent of container ships would be fitted with scrubbers to avoid using the new, low-sulphur fuels which are expected to be to be available in third quarter 2019.
He also notes that this would increase bunker price volatility ahead of the implementation. With the difference in price between bunkers currently in use and the new fuels being introduced this might increase by as much as US$500 per tonne. He also says carriers would need to pass on all the additional costs on to shippers.
LNG bunkering – a solution to IMO 2020 problems?
Initially, the shipping trade press (and lawyers) initially looked somewhat pessimistically at LNG bunkering as a solution to the IMO 2020 deadline. First, they believed that high costs and technical difficulties would present a commercial barrier to industry-wide LNG bunkering being adopted. However, in the past year there has been an interesting series of world firsts for new-build and retro-fitted LNG-powered vessels in different sectors, including cruise ships, ferries and more general commercial carriers. For example, in March 2019 Maritime Executive reported on the retrofitting of the Sajir [a large German container ship built in 2014], which will be the first mega-container vessel to be converted to a dual-fuel system.
Various innovations are also underway, including Cryo Shipping’s conversion of platform supply vessels into LNG tankers for ship-to-ship supplies. They may help ease congestion at LNG bunker ports or provide supplies in areas that are not serviced by such ports. These reports – together with commitments from large owners (e.g., CMA CGM and MSC) – suggest that owners may become more receptive to LNG bunkering than expected. The world fleet of LNG-powered vessels has jumped from 118 vessels in 2017 to 143 vessels in 2019. As well, about 135 LNG-powered vessels are also on order.
Adopting LNG bunkering to meet IMO 2020 deadline or adopting other available options such as using low-sulphur fuel or installing scrubbers depends on various factors. Thus, owners may adopt different solutions even within their own fleets. That’s because there is no perfect solution. Owners must be sensitive to trading patterns and available infrastructure.
Using low-sulphur fuel leaves owners at the mercy of oil and freight volatility. Scrubber retrofits may not offer fully predictable outcomes such as new geographical restraints, including the ban on open loop scrubbers in Singapore, China and Fujairah, and the expected ban in the Norwegian fjords. The high cost of LNG retrofitting negates the value of doing so on vessels close to scrapping age or those operating without ready access to LNG bunkering ports. LNG bunkering makes more sense for owners ready to invest in new vessels or for retrofitting less elderly vessels that operate in areas such where LNG bunkering infrastructure currently exists, such as Northern Europe.
To comply with a mandatory restriction in sulfur oxide emissions, thousands of ships are being taken out of the market to be fitted with scrubbers to enable them to keep burning today’s cheaper fuel. The ships that don’t have them are expected to have to pay more fuel to meet the new standard.
“The main reason is that a rising number of vessels are going off-hire to retrofit scrubbers ahead of the January 1 deadline.” said Burak Cetinok, head of research at Arrow Shipbroking Group in London. “Basically, you’ve got strong export volumes on the one hand and restricted vessel supply on the other. This has been boosting the rates.”
Rates have been surging because ships were being scrapped earlier this year after a dam collapsed in Brazil prompted Vale SA to shutter some mining operations, choking off iron ore cargoes and sending rates plummeting, according to shipping industry association BIMCO (The Baltic and International Maritime Council). That demand growth has now returned to a smaller fleet of available ships, boosting earnings.
Iron ore producers are making up for previously lost production while deliveries of new ships are slowing, said Jonathan Chappell, an Evercore ISI analyst adding that dozens of ships have been removed from the fleet to fit scrubbers. “it’s a simple case of incremental demand exceeding incremental supply right now,” he said.
Besides the fuel switch, freight rates are being buoyed by relatively slow fleet growth and demand that’s held up despite a trade war between the U.S. and China, according to Cetinok.
Total supply of commodity carriers will grow by almost 3% this year. In the past decade, the fleet’s capacity has at times expanded by well over 10%, based on data from Clarkson Plc, the world’s largest shipbroker.
But the recent spurt may not last, according to Bimco’s Sand. Iron ore imports into China have come down by 5% in the first seven months of the year — something that’s bad news for a market that relies on the Asian country to boost the flow of cargoes.
“I would not expect the nine-year high to last the full year, I would expect more volatility,” he said.
The cost of shipping commodities by sea surged to the highest in almost nine years as vessel owners start taking carriers off hire to prepare them for sweeping new fuel rules.
The Baltic Dry Index, a measure of freight for everything from coal to iron ore to grains, surged to 2,378 points at the end of August 2019, the highest since November 2010, according to figures from the London-based Baltic Exchange. Capesizes are earning almost $35,000 a day, the most in at least 5 1/2 years.
Joint Industry guidance: messaging
A group of shipping, refining, fuel supply and standards organizations have worked together to produce Joint Industry Guidance on the supply and use of 0.50 percent sulfur fuel.
Its key messages include:
- Monitor fuel quality by ensuring that blend components are suitable for bunker fuel production with a particular focus on final product stability.
- Fuel suppliers and purchasers must should provide adequate information about fuel supplied to the ship’s crew enabling them crew to identify and manage potential safety and operational issues related to certain fuel properties and attributes.
- Fuel traits are likely to vary considerably between bunkers. Crew members must proactively handle fuel management. They must know fuel characteristics as loaded and be able to respond to changes such as on-board temperature requirements and commingling.
- The key concern is assessing the compatibility of 0.50 percent sulfur fuels from different sources. Wherever possible, fuel should be loaded into an empty tank. To avoid commingling on loading, the available space for new bunkers should be taken as the capacity of the empty tanks.
- Ship operators and fuel suppliers should review operational practices to allow sufficient time for compatibility test between existing and proposed bunker fuel delivery, especially if no “empty” dedicated storage tank exists on the ship.
The new IMO regulation will entail a radical change for the entire shipping industry. Transitioning from fuel with a sulphur content of 3.5 percent to low-sulphur fuel oil will be a complex task. “It’s not about simply flipping a switch at the turn of the year, as every single ship will have to be closely examined to determine the best possible type of change depending on its design,” says Richard von Berlepsch, Managing Director Fleet Management at Hapag-Lloyd. “That’s why a large number of Hapag-Lloyd departments connected to fleet operations are currently working on this issue.”