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Low sulfur fuel

New low-sulfur regulation – what you need to know

New rules on ship emissions that are coming into force on January 1, 2020, are already starting to have an impact on the ocean freight industry. Cargo owners are affected in two major ways: increased cost and potential supply chain disruptions. Panalpina is here to support customers in the transition.

What is the new regulation and why was it introduced?

 

Roughly 90 percent of world trade is by sea and sulfur-rich fuel powers the merchant fleet of about 95,000 vessels, including container ships.

 

In October 2016 the U.N. International Maritime Organization (IMO) announced it will limit the sulfur content of bunker fuels to 0.5 percent, compared to 3.5 percent now in most parts of the world, as of 2020.

 

The new regulation was introduced to protect the environment and human health.

 

Who is affected?

 

The reduced sulfur limit affects many parties:

  • refiners (those who supply and sell fuel)
  • ship owners and operators (those who buy and use fuel)
  • cargo owners, companies that use ocean freight to transport their products
  • third-party logistics providers offering ocean freight to those companies
  • end users / consumers of the transported products

How can ship owners and operators comply?

 

Ship owners and operators including boxship carriers have three main options to comply with the new sulfur regulation:

 

1.     Use low-sulfur fuel at higher costs.

This is the most straightforward way to comply. However, it is uncertain whether enough low-sulfur fuel will be available in the right quality in time. In any case, ship owners and operators will pass these costs on to their customers wherever possible.

 

2.     Use “scrubbers”, systems that clean exhaust gases.

Ships can install scrubbers to “clean” emissions before release into the atmosphere, meaning that they can continue to use high-sulfur fuel and still comply with the 0.5 percent limit. The initial investment of this technology could be hefty, before seeing a return on investment. Industry observers also point out that it could take more than 100 years to fit the global merchant fleet with scrubbers.

 

3.     Use alternative sources of fuel that have lower sulfur oxide emissions.

Alternatives include clean gas LNG (which leads to negligible sulfur emissions when ignited) and methanol (which is used on some short sea services). This option is not viable to date, as a global LNG bunkering network remains underdeveloped.

How will it affect global supply chains and particularly cargo owners?

 

Companies shipping via ocean freight will face increased costs and possible supply chain disruptions.

 

Increased costs will apply, no matter which option ship owners and operators take to comply with the new sulfur limit. These costs are associated with higher demand for low-sulfur fuel or installing scrubbers. Carriers seem determined to pass these costs on to cargo owners and third-party logistics providers.

 

The new regulation will ban ships using fuel with sulfur content higher than 0.5 percent, unless vessels have installed scrubbers.

 

This could result in ships being fined or not being allowed to make port calls. Disruptions could also result as ships are retrofitted and because there might be delays in the supply of more environmentally-friendly fuel types.

 

When will we start seeing an impact of the new regulation?

 

Directly related cost increases are expected to spike in the second half of 2019. 

 

In addition, some countries have already introduced the new sulfur cap. China has implemented a 0.5 percent sulfur limit along its entire coastline from January 2019. Hong Kong and Taiwan have also implemented a 0.5 percent sulfur cap one year ahead. As of January 2020, China will impose an even stricter sulfur cap of 0.1 percent, same as in Europe where this already applies.

What is Panalpina doing for its customers to support the transition?

 

We are committed to proactively providing our customers with qualified advice and information about the new regulation and its impact on global supply chains. To this end, Panalpina is:

 

  • in particular monitoring the ocean freight market and price developments
  • making ocean freight customers aware that all carriers will likely pass on the additional, low-sulfur fuel-related costs to cargo owners
  • informing customers about price developments on specific trade lanes
  • developing a transparent and competitive pricing mechanism to pass through increased costs from carriers to cargo owners
  • pointing customers to potential supply chain disruptions resulting from the new regulation
  • advising customers on how best to avoid such disruptions

 

More questions? Write to us on sulfur.queries@panalpina.com