From January 1st 2020 onwards, all seagoing vessels will have to reduce sulphur oxides by 85%. The new regulation is set by the International Maritime Organisation (IMO) with the aim of cutting sulphur oxide gas emissions, protecting public health and supporting the environment. Vessels must use marine fuels with a maximum sulphur content of 0.5% compared to the current limit of 3.5%.
Vessel operators have the following choices to comply with the new IMO 2020 sulphur limits:
1. Use Scrubbers
They can use Scrubbers (emission cleaning technology) to remove pollutants from the ship’s exhaust, which allows them to continue using higher-sulphur fuels. However, the process of installing Scrubbers is limited and expensive due to space and capacity constraints and will increase operating costs. In addition, the price and availability of higher sulphur fuels after 2020 remain uncertain. Furthermore, there is currently on-going controversy over the use of Open-Loop Scrubbers and the Environmental impacts they would still have in the Sea, with some Countries such as China, Singapore and Malaysia already advising they will be strictly prohibiting vessels calling into ports that use Open-Loop Scrubbers, meaning that Carriers best option would be to use Closed Loop Scrubbers.
Approximately 10-12% of the Global Vessel fleet is expected to utilise Scrubbers whilst the development of VLSF and LNG Technology are still in it's early stages.
2. Switch to non-petroleum-based fuels
They can switch to non-petroleum-based fuels, such as Liquefied Natural Gas (LNG). This is feasible for newer vessels with appropriate specifications. However, the infrastructure to support the use of LNG is currently limited in scope and availability.
3. Switch to a Very Low Sulphur Fuel (VLSF) or MGO
They can switch to a Very Low Sulphur Fuel (VLSF) or MGO that complies with the new rules - this being the option that most Shipping lines are choosing to utilise.
What will be the impact on freight rates and operations?
The use of each of the above 3 options each brings high additional operating costs respectively to the Carriers, with total cost calculations to the Carriers expected to be in the region of $15 billion. Consequently this will result in an increase to BAF rates being passed onto Forwarders and Shipper's alike. Whilst the new regulations do not come into effect until the 1st Jan 2020, we are seeing that Carriers are all set to introduce the increased rates from 1st December.
Operationally, we are finding that due to approximately 10-12% of the Global vessel fleet set to be equipped with Scrubbers, vessels are being taken out of service by some Carriers which is resulting in blank sailings throughout Q4 2019. The impact of this will result in other Carriers reaching maximum vessel capacity quicker than usual to take the additional volume of Containers during the blank sailing weeks.