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New IMO 2020 Regulations Will Have Drastic Impact on Shipping Industry

     Incoterms

The International Maritime Organization (IMO), in a landmark decision for both the environment and human health, has set January 1, 2020 as the implementation date for a significant reduction in the sulphur content of fuel oil used by ships.

IMO Sulfur 2020 (IMO 2020) calls for a global sulphur limit of 0.50% m/m (mass/mass).  This represents a drastic cut from the 3.5% m/m limit currently in place and demonstrates a clear commitment by the IMO to ensure the shipping industry meets its environmental obligations.

The shipping industry as a whole is one of the greatest contributors to pollution and carbon emissions on the planet: maritime shipping consumes 4.4M barrels of oil per day, accounting for 10% of the oil consumption attributed to the entire transportation sector.  Further, international maritime transport is responsible for approximately 5% of global oil demand.

There are three ways to meet the new IMO 2020 standards and compliance will be prohibitively expensive:

Buy cleaner fuel – Ships can make the switch from high-sulfur fuel oil (HSFO) to marine gas oil (MGO).  This is the easiest and quickest solution, but will likely lead to an MGO fuel shortage if most carriers choose this option.  MGO is approximately 50% more expensive than HSFO.

Install scrubbers – Vessels can continue using HSFO as long as scrubbers are installed to effectively “clean” the emissions before they are released into the atmosphere.  However, scrubbers are a patchwork solution based on emerging technology and the industry has yet to create a set of standards.  They can take four to six weeks to install and cost between $5-10 million depending on the size of the vessel.  Capacity crunch and cost aside, carriers will also have to responsibly dispose of the sludge produced by scrubbers.

Order liquified natural gas ships – Ships that run on liquified natural gas (LNG) will drastically decrease pollutants, however, LNG tanks could also enhance the capacity crunch as they take up almost 3% of a vessel’s TEU slots, whereas scrubbers occupy at most 0.3%.  In the long term, LNG ships take years to build and retrofitting current vessels to burn LNG is expensive.

IMO 2020 will have a ripple effect across the shipping industry, the economy, and the environment.  Maersk determined that IMO 2020 will cause its yearly fuel costs to top $2 billion (approximately $100-175 per TEU, depending on length of journey), and announced its plans to shift those increased fuel costs onto its customers before the regulations take effect.  Other carriers are following suit.

Importers and exporters must plan to absorb increased costs and be ready for potential service disruptions when carriers begin changing their rates as a result of complying with the regulations:

  • Carrier costs are expected to increase by 15 to 20%, depending on distance.
  • Price volatility and service disruptions are anticipated due to fluctuating fuel prices and reduced carrier capacity.

While IMO 2020 will have negative economic consequences for both carriers and the shipping community, the environmental consequences of not implementing these regulations could be enormous.  IMO 2020 is projected to reduce overall sulfur oxide emissions by 85%, which will:

  • Reduce the occurrence of lightning storms along trade routes, especially in the Indian Ocean and South China Sea.
  • Reduce the occurrence of acid rain, which harms agriculture and crops.
  • Reduce respiratory problems and cardiovascular disease in populated port cities and coastal areas.

For more information, contact Debbie McGuire, Manager – Freight Solutions.

Quick Tip #5
Clarifying the limitations of Incoterms

Don’t make the mistake of assuming Incoterms define anything other than the terms of delivery. For example, Incoterms do not cover:

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