IMO 2020 - who is going to pay
Much has been written about January 1st, 2020 and the introduction of IMO 2020, writes Dean Davison.
For the remainder of this year there will be ongoing speculation about what will happen once low sulphur fuel is introduced and it is not until we truly get into 2020, and the operating dynamics of shipping lines are made known, that will we truly understand the impact.
So, before we speculate any further, it’s a good opportunity to take stock of the situation and look at what we know already. The International Maritime Organization (IMO), the U.N. specialised agency with global standard-setting ability has several key objectives to achieve as part of its remit.
These include creating/implementing universally adopted regulatory frameworks for the shipping industry, the overall safety and security of shipping, prevention of marine and atmospheric pollution by ships and environmental performance of international shipping.
Therefore, on January 1st, 2020 the new Low Sulphur Regulation will require that ships reduce their emissions of sulphur by 85%, with the current 3.5% m/m (mass by mass) sulphur content of fuel to drop to 0.5% m/m. Indeed, some areas already have 0.1% m/m restrictions, notably the Baltic Sea.
For the container shipping industry, there are three options available, with both positive and negative factors applicable, as Table 1 confirms.
There are clearly choices that need to be made, although perhaps the clearest one is not openly evident yet. However, regardless of the preferred option it is certain that additional costs will be incurred and with fuel representing over 50% of operating expenses for a shipping line it could be a cost that cannot be is a cost too far!
Here we find probably the crux of the matter and another decision that will need to be made – paying the costs. From the ocean carrier side, Hapag Lloyd’s president for North America has already stated that “Carriers that do not recover the costs to grab market share, would be looking at a short-lived venture,” while the President of ZIM USA agreed that carriers would be “stupid” if they do not pass on the increased cost of fuel to their customers.
Nevertheless, at the time of writing, the exact economic impact is not known, simply because there is no industry standard for fuel-surcharges computation or a clear picture of
the underlying costs for low-sulphur fuel.
If we consider that Bunker Adjustment Factors (BAFs) are already a very difficult cost to pass on, especially when it is a “sellers” market, it will not be an easy task convincing shippers of the need to pay new BAFs – especially when BAFs themselves are regarded as involving secretive rates.
So, as we approach the 4th quarter of 2019 and January 1st, 2020 really starts to appear on the horizon there is a delicate balance. Of course, IMO 2020 is a positive environmental achievement and it is coming to the container shipping industry, for sure.
At the same time, there is no doubt that IMO 2020 will increase costs in all trade lanes and the shipping operators will look to pass on or share costs with cargo shippers and owners, even though it will be extremely difficult to achieve.
As a result, does it mean that it will ultimately be consumers that will have to meet these additional costs? And in the same way that carbon neutral costs are a feature in the airline industry, will consumers be happy to pay more to ensure a more environmentally friendly ocean-going freight transport activity?
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