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IMO 2020 Regulation: Fuel Transparency Key for the Industry

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IMO 2020 is a current hot topic in our industry and one that affects all stakeholders in one way or the other. Last month, we had the pleasure to welcome Neil Dekker, Shipping Consultant, as a speaker at our annual Xeneta Summit customer conference, where he gave us a detailed presentation on the status of IMO 2020 preparations. Below is the overview of his talk in his own words. 

Guest Blog post from Neil Dekker

Future industry pricing implications surrounding the IMO’s low sulphur fuel regulations in January 2020 are now starting to cause intense debate. This issue is big news for the world’s shipping media and stakeholders are after two years waking up to the fact that they need to start preparing. This is exactly why Xeneta positioned this as a major discussion item at its annual client summit in Amsterdam, last month. Over 100 shippers and freight forwarders attended the session.

The implementation may be 14 months away and one crucial fact is that even the energy experts do not know what the price of fuel will be in January 2020, but we can still already determine some estimated costs and implications for shippers and freight forwarders. Our view is that current price trends suggest the add-on cost for low sulphur versus heavy fuel oil will stay at the 50% level.  

IMO 2020 Freight Rate Implications

Based on current industry data, we calculated that with a $200 per mt differential between HFO and new low sulphur fuel oil costs, the world’s top 14 shipping lines would incur an extra fuel bill of $11.5 billion per annum. At the individual box level this is roughly $65 per teu in additional fuel costs. Of course, this will differ at the individual trade level and not every line will put the same cost into the market, but for the key Asia to North Europe lane for example, we estimate an extra $86 per teu - which equates to $5.6 million per operational loop per annum.

These are just the fuel costs and we cannot forget the additional CAPEX costs. Many shipping lines are choosing to install scrubber technology and if, for example, the entire global container fleet of ships over 8,000 teu were to be installed with scrubbers, this would cost between $2.3 and $5.2 billion. The vast majority of these ships will not be compliant in time anyway since there is not enough yard space or time to complete this by January 2020. The utilization of low sulphur fuels is the more likely scenario for the industry and shipping lines will be using and testing this fuel on their routes during Q419.

An essential point from the shipper side is that ocean carrier costs have never been particularly transparent. Most liner surcharges are covered with the caveat that costs have increased and so the surcharge is simply justified in order for carriers to maintain a service. This is no longer acceptable.

Recent press releases from several of the major shipping lines have suggested that additional fuel costs will be covered by a charge that is totally separate from the main sea freight element and that this will be based on several factors - including average vessel size, fuel consumption and distance travelled. This is the start of some meaningful dialogue, but there is a long way to go yet.

Shipper feedback at the Xeneta Summit customer conference concerned a number of pertinent questions:

  • Transparency of costs structure was the number one issue. How exactly are the costs calculated by each line?
  • What additional costs are there for using scrubber technology and how will these be built into the cost structure?
  • How will lines communicate the success of reduced emissions to the outside world? After all, this is also about sustainability for the future and not just cost.
  • Current discussion has been focused on the deep-sea trades, but how will costs be affected on short-sea and regional routes?
  • Some shippers have used their own bunker formula within existing contracts and so are they allowed to use these in the future or will they be forced to utilise carriers’ new formulae?

What’s the Play from Carriers?

One final thought is to determine how the new fuel surcharge mechanism will play out in the industry and will the advantages gained by carriers from new fuel-efficient ships be correctly passed on to shippers?  And what about the hedging of forward fuel costs? If carriers are taking advantage of this, do they then need to account for this in an additional surcharge?

Each shipping line will ultimately market different levels of fuel surcharges. As an example, Hapag-Lloyd’s initial information suggests that pricing will be based on average-sized ships within a trade lane as well as collective global data. But, this is not utilizing performance data from Hapag-Lloyd’s particular vessels operating within that trade lane. These ships may be relatively more or less efficient than the trade lane standard. Is the industry, therefore, going down the route of individual company surcharges or will it end up after a period of time with an industry BAF which is accepted by all global shippers and that this is applied within contracts?

The flip side is the view from the ocean carriers and it is clear that they cannot bear such a huge fuel bill alone. If their attempts to pass this through to shippers are not successful, the likely outcome is massive supply chain disruption and the heavy suggestion that many ships may have to be idled or laid up.

This is exactly why concerted and proper debate is required by all parties and transparency is so vital. Once this is achieved, the new fuel bills will hopefully be settled in an acceptable manner and rate volatility and disruption will be kept to a minimum. This may be a hope which seems far removed from reality right now, but it is something that this industry genuinely needs to address once and for all.

Even before we reach 2020, it is clear that shipping lines will start implementing new bunker surcharge mechanisms from early 2019. Fuel costs have increased by 35-40% in the last 12 months and the industry is expected to make a loss this year. Next year will see major attempts by shipping lines to recover these costs.

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