Reality of IMO 2020

Damp Squib or Revolution?

By Carly Fields and Gary Burrows

As the clock ticked over into the new decade, the much-discussed and long-awaited International Maritime Organization regulations on sulfur content limits in marine fuels finally kicked in.

Today, the heavy-lift and multipurpose fleet must burn fuel with a sulfur content no greater than 0.50 percent mass by mass in global waters not already subject to the 0.10 percent m/m limit in emission control areas.

In the lead-up to the deadline, low-sulfur fuel oil sales rocketed as shipowners prepared for this landmark change. Preliminary estimates from The Maritime and Port Authority of Singapore and cited by shipping organization BIMCO indicated that sales of low-sulfur fuels in the bunkering hub, including low-sulfur fuel oil and low-sulfur marine gasoil, rose by 51 percent month-on-month in December 2019 to 3.13 million tonnes, compared with the 1.27 million tonnes of high-sulfur fuel oil sold in the same month.

In a comment in January, BIMCO Chief Shipping Analyst Peter Sand said: “The shipping industry has been riddled with market uncertainty in recent months, but the bunker sales in the port of Singapore provide one of the first readings as to how the industry has transitioned into compliance with the IMO 2020 regulation. We have now surpassed the first wave of IMO 2020 and hopefully the accompanying market uncertainty will diminish as we proceed into 2020.”

At the start of 2019, low-sulfur fuel sales accounted for just 8 percent of total sales compared with a jump to 70 percent in December.

“The shift in bunker sales underlines the massive transition that the shipping industry has been faced with at the turn of the decade,” Sand said. “Almost from one day to another, IMO 2020 has resulted in a massive increase in bunkering costs for shipowners and operators, costs which for many companies cannot be sustained for a prolonged period.”

Breakbulk asked key players how the changeover has gone and whether the fuel concerns of 2019 have proven true in 2020.

Murray Cooper, Director Corporate Governance, LV Global

“Our exposure has been focused on the implementation of the BAF (bunker adjustment factor) surcharges imposed by shipping lines, which vary from between +40 percent to +15 percent on the same port-port trade lane.

“In some instances, shippers are being exposed to the challenge of selecting the most competitive BAF option on alliance vessels where the shipping line partners have published different rates for containers loaded on the same vessel/voyage.

“Shippers are having difficulty quantifying the overall cost impact of the IMO 2020 regulation on the products they are trading.

“It’s interesting to note that the offshore oil and gas workboat fleet has been dealing with the challenges of variable bunker fuel sulfur content regulations by region for a number of years. However the commercial shipping industry is facing new challenges.

“IATA publishes monthly fuel surcharge and security surcharge rates – a baseline/standard for all airlines – for each major region; the IMO should consider offering a similar service.”

Roger Strevens, Vice President, Global Sustainability, Wallenius Wilhelmsen
“The maxim, ‘the more you prepare the luckier you get’ has held true. As a liner operator we know where our vessels will be long in advance, which allows us to plan our bunkering in advance too. That in turn enables us to consolidate our bunkering, which when combined with the fact that we buy fuel for a fairly large fleet means that we’re in a somewhat stronger and more predictable situation than many, particularly smaller tramp operators.
“To sound a note of caution though, one of the big uncertainties of the IMO 2020 sulfur transition, compatibility, still lies ahead. It will not be until carriers start bunkering very-low-sulfur fuel oil for the second time, that the scale of that challenge will be known.

“It is also too early to understand the character of enforcement on a global basis. The Trident Alliance, a group of shipping companies that are campaigning for full and effective enforcement of sulfur regulations, is paying close attention to that issue.

“We have taken a very proactive approach to our bunkering and that has served us well. However, just because Jan. 1, 2020 has come and gone does not mean that we’re back to plain sailing. The fuel markets are still volatile, price differentials have not settled and nor has a new equilibrium been struck between supply and demand. On the technical side (and as mentioned above) the magnitude of the compatibility issue is not clear either. For all of these reasons we will maintain our highly vigilant and proactive approach.”

Albert Pegg, Managing Director, Atlas Breakbulk Alliance
“Having previously worked for a major shipping line I’m convinced that the bunker adjustment factor will be effective in this new environment. Shippers will need to choose carriers or operators that have done the necessary with regards to choosing bona fide bunker suppliers and can prove they have a ship implementation plan for IMO 2020 in place.”

Hansje Dahmen-Verkade, Corporate Communications, Spliethoff Group
“Up to this moment we have not encountered any issues with the fuels. But we are not even one month into 2020, so it is too early to draw final conclusions.

“Our main concern on low-sulfur fuels is the compatibility of different blends, the compatibility of different viscosities and the effects of the use of lower viscosity fuel.

“Also the costs of being compliant, either via investment in an exhaust gas cleaning system or by using compliant fuel, cannot be borne by the carrier and should be accounted for in the project or shipment contracts.”

William Moyersoen, CEO, ArcelorMittal Logistics Belgium
“So far the new IMO 2020 rules have not created any changes in our operations. Obviously existing bunker clauses in our agreements with carriers have been updated taking into consideration the new situation. In many cases these new bunker clauses were already in place in the fourth quarter of 2019.

“The future will bring us to have a closer look to CO2 emission and the reduction thereof. ArcelorMittal has announced it will reduce drastically its CO2 footprint, including on the production of steel itself.”

Cyril Joseph Varghese, Global Logistics Director – Strategy & Commercial, Fluor
“Many shippers have made provisions for freight increases for projects going into 2020, but there are also a great number of shippers and freight forwarders who have remained ignorant about the upcoming disruptions. It is too early to assess the full commercial impact of the regulations, as it takes time for the market to react to changes.

“I am interested to see how the pricing of compliant fuel fluctuates over the year and how the availability of fuel in required commercial quantities at most of the bunkering gateways eventually materializes.

We are very keen to understand with carriers how the pricing is impacting operating costs and how much they are able to recover from the market.

“For both existing and planned projects, we have made significant efforts to segregate the fuel component from total shipping costs by trade lane, and have made provisions for additional freight based on projected average bunker cost assumptions. We are now in the stage of reviewing proposed changes from the carriers and closely monitoring market freight developments.”

Ulrich Ulrichs, CEO, BBC Chartering
“We have had no major concerns with regards to the sourcing and use of very low sulfur fuel oil, but the operations and chartering departments need to continue to carefully plan the voyages and check availability of fuels where and when required.

“We are very concerned, however, about the spot market. The tremendous extra costs (early January very-low-sulfur fuel oil prices were almost double high-sulfur fuel oil prices, and early February they were about 40 percent to 50 percent higher) are not being accepted by the market or all clients yet. However, the industry has no choice but to pass on those costs to the shippers as otherwise the number of players in the market or service levels will be reduced. BBC has no choice but to say no to certain cargoes that are not able or willing to bear the extra costs carriers are facing.”

Marco Poisler, Executive Vice President, UTC Overseas
“We are not aware of any major issues to date in terms of supply. The industry anticipated that there would be initial shortages, and that the required fuel would not be available in all locations when needed. There is per all studies done sufficient refinement capacity, but it will be some time before the supply requirements are fully understood, and until then it is inevitable there will be some supply issues, and of course considerable pricing volatility.

“The more difficult part of the question concerns the use of low-sulfur fuels. From the outset we were fully supportive of the switch. However, there are several aspects attached to the switch. Shipowners were faced with several choices: convert to the new fuel; install scrubbers that allow use of less prescriptive fuels; or scrap vessels as any conversion costs relative to age and other parameters do not justify conversion. Each of these choices has several implications and all come at a cost. The carriers justifiably feel entitled to redeem these costs from their user base. Whether they will or won’t is debatable, and only time will tell whether they redeem all costs or actually make a margin on them. But this is not a healthy industry and it’s a further threat to their viability. There are subtle, less understood factors such as banks increasingly less likely to loan to the industry, all of which add to a clouded longer-term picture.

“Project owners look for certainty in pricing for extended periods to cover their projects. In terms of the transport aspect of these, floating bunker clauses have always been a contentious issue. The added specter of uncertainty the new fuels standards have bought in has been another point of debate.

“Our biggest concern regarding the new fuel standards and their impact on project contracting is the yet-to-be-determined impact on the specialist vessel sector of the market. Many of these vessels are aging, and the conversion cost to handle new fuels may justify accelerated and possibly premature scrapping. This could create a shortage of tonnage and not only cause a spike in rates, but may actually delay project execution.”

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