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Rough Seas Ahead for the Peak Season as Threats Loom from IMO 2020, Tariffs

The threats of tariffs on Chinese goods and the International Maritime Organization’s (IMO) low-sulfur fuel regulations, known as IMO 2020, will cause a spike in demand for shipping services in the second half of the year.

Many importers are already rushing shipments to avoid the potential tariffs that President Trump threatened to impose on the remaining $300 billion worth of Chinese goods.  At the same time, industry experts and ocean carriers are predicting the IMO 2020 rule will drive a rush in shipments, especially with the uncertainties surrounding the cost implications of complying with the new regulations, which are expected to be passed on to shippers.

The impacts of IMO 2020, which goes into effect on January 1, 2020, are already beginning to cascade throughout the global supply chain.  Refiners and ocean carriers are busy strategizing and implementing efforts to comply with the new regulations, while shippers are planning ways to mitigate the inevitable increase in transportation costs associated with the changeover.

Shippers should be prepared to expect rough seas in the months leading up to and immediately following the IMO 2020 implementation.  David Bennett, President, Americas for Globe Express Services, warns “you will see spot market rates increase [and] start seeing space issues develop rather quickly,” which could lead to a severe capacity shortage.  Forbes also warns that “IMO 2020 will bring higher costs, more volatility, and… cleaner air.”  There is also a higher likelihood of delays due to cargo getting rolled over at origin, denied port calls, low fuel supply, or vessels taken out of service for retrofitting.  Industry experts anticipate the effects of IMO 2020 will ripple throughout 2020.

 

What is All the Fuss About IMO 2020?

The International Maritime Organization (IMO) issued the IMO 2020 regulation in 2016 in response to growing concerns over harmful sulfur emissions from ships.  With more than 125,000 commercial and naval vessels operating around the world, accounting for over 80% of global trade, ship-engine emissions are projected to rise by 250% by the year 2050.  The IMO 2020 regulation mandates that vessels traveling in international waters reduce sulfur from 3.5% to 0.5%, by January 1, 2020.  The IMO states that this new regulation “will significantly reduce the amount of sulfur oxide emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”

In order to reduce sulfur emissions, ocean carriers have a few courses of action they can take to be complaint and manage costs.

1)  Switch to low-sulfur fuel oil or clean fuels, such as liquefied natural gas

One option that ocean carriers may opt for is low-sulfur fuel oil (LSFO) or clean fuels, such as liquified natural gas (LNG), which are significantly more expensive than the heavy fuel oil (HFO) that is currently used by containerships.  But just how much more expensive the LSFO will be remains to be seen.  Sergery Ivanov, Director at the Marine Bunker Exchange (MABUX), said “we do not have all the answers as to when, where, and how much, making it difficult to forecast what the exact margin will be between HFO and LSFO…  Right now, we see that marine gas oil [LSFO] trades at a premium of about $250 per ton more than HFO, but the forward curve forecast is that it may rise to about $380 per ton at the beginning of 2020.”  As the premium for LSFO remains unclear, vessel operators cannot properly anticipate the increase in their fuel cost or even advise clients how much extra they will be expected to pay.

Adequate fuel supply will be a major concern once the regulation takes effect.  Fuel shortages would cause freight rates to increase even more and could cause delays at sea, as ships would be forced to detour to refuel more often.  In an article published by BIMCO, the international shipping association, the bunker exchange cautions that “shipowners are ready [for IMO 2020], but the bunker market is not.”  The association went on to say that reports from oil majors regarding the delivery of low-sulfur fuel oil (LSFO) “are concerning.”

MABUX said that the first regular delivery of the new LSFO is expected sometime in the third quarter.  “This picture suggests the question of availability of very low-sulfur fuel is critical at this point.  No one is sure that there will be enough LSFO in all the main ports in the world,” said Mr. Ivanov.  “In our view, shipowners are ready.  Many are in a position now where they can say ‘give me compliant fuel, and I will adjust my power system, I will train my crew and start using it’…  But they need the compliant fuel, and they cannot get that now.  They do not currently have much choice.  Many of them are ready, but the bunker market is not,” he warned

Many container lines are also worried about the quality and standardization of blended LSFO, which could lead to supply chain disruptions.  Currently, there is little standardization globally on the composition and qualify of LSFO.  This lack of standardization could lead to compatibility and stability issues which could impact a ship’s machinery.

2)  Slow Steaming

Slow steaming is a process of deliberately reducing the speed of cargo ships to cut down on fuel consumption.  While traveling slower may help reduce emissions and cut costs, it increases transit times.  In order to meet time schedules, ocean carriers would likely make fewer port calls

Many container carriers oppose the slow-steam option because they believe it would hamper their efforts to improve services, while critics say that speed reductions would make the movement of cargo more expensive.  Tim Seifert, a spokesman for Hapag-Lloyd said, “We would have to add more ships to match our business model.”  If more ships are added, it would significantly increase the cost of moving cargo.

3)  Scrubbers

Instead of burning expensive fuel, many shippers may opt to capture the sulfur before it enters the atmosphere by using scrubbers.  Scrubbing systems remove the sulfur emissions from the exhaust, and the cleaned exhaust is passed through the system into the air.  The used-up material is collected in wash water, which may be disposed of immediately or stored for future disposal.

According to the Visual Capitalist, only 1% of the global shipping fleet has been retrofitted with scrubbers and only 5% are expected to be retrofitted by mid-2020.  There are a few reasons for such low installation numbers.

The lead time for scrubber manufacturing is six months, and ships are removed from service for two to four weeks for installation.  In addition to the down time for vessels to be retrofitted, cost savings for this solution won’t be felt until years after installation.

Many groups are also concerned about the impact that open-loop scrubbers will have on the environment.  Open-loop scrubbers discharge the wash water directly into the ocean, while closed-loop and hybrid scrubber systems store the wash water for later disposal.  Some ports, such as Singapore and Fujairah, have even banned the use of open-loop scrubbers.  Findings of two recent studies on open-loop scrubbers indicate that scrubber wash water is safe for the environment.  A multi-year study by Carnival Corporation found that “scrubber wash water is safe for the environment and complies with concentration standards used by IMO and the shoreside water quality regulators in Europe.  The preliminary results of an independent study by CE Delft, a Dutch research organization that specializes in environmental issues, indicates that “accumulated concentrations of exhaust gas cleaning systems (“scrubbers”) wash water components are at very low levels and well below applicable regulatory limits.  Arne Hubregtse, Executive Committee Member of CSA 2020, said “these initial findings are very promising and suggest that those ships operating open-loop EGCS will have near zero impact on the quality of harbor waters.”

 

Trucking Will Also Suffer

While the IMO rules do not apply to truckers, they will face competition from ships for the low sulfur fuel.  According to Reuters, IMO 2020 regulations will push up the price of diesel fuel by as much as 100%.

 

What Can Shippers Do?

There is considerable potential for supply chain disruption due to delays in retrofitting of scrubbers, inadequate fuel supply, and denied port calls.  Shippers are expected to see extra costs from carriers trickle through in Q3 as the vessels start replenishing with the more expensive low-sulfur fuel.  Some industry experts believe there will be a 15-20% increase in rates and up to a 10% decrease in capacity.

The tips outlined below can help you avoid costly delays, increase turn times, and reduce costs.

Plan Ahead

Freight forwarders, such as OCEANAIR, are your greatest allies in helping you navigate this turbulent the peak season.  Communicate early and often with your freight forwarder and provide them with insight into your shipping forecasts and purchase orders so that they can advise you on the best routing options and the most appropriate lead times.  Ideal lead times for this peak season are outlined below.

  • Air: Book 6 – 7 days in advance of the Cargo Ready Date (CRD)
  • Ocean: Book 3 – 4 weeks in advance of the CRD
    • When booking an ocean shipment, keep the following considerations in mind:
      • Transit times for LCL shipments will be 7-10 days longer than FCL shipments
      • Avoid shipping 45’ HC containers if possible, as these are more likely to be rolled
      • Ports and warehouses will be extremely congested, so expect more time to load / unload at point of origin and destination
  • Trucking
    • FTL: Book 2 weeks in advance
    • LTL: Book 10 days in advance

Be Flexible

Consider choosing a service with a slightly longer transit time.  The fastest transit time services are more likely to be overbooked, which increases the chances for having a shipment rolled.

Be Prepared to Pay for Extra Fees

Peak season surcharges (PSS), bunker surcharges, emergency bunker surcharges (EBS), and general rate increases (GRI) may drive up costs for all modes of transport.  As congested ports equate to longer wait times for truckers, carriers may apply wait fees and/or port congestion fees.  Some ports and rail ramps may also apply chassis split charges if they experience chassis shortages.

 

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Sources:

 

  • JOC, Tariffs, IMO 2020 promise a hectic peak season
  • The LOADSTAR: 1) Impact of IMO 2020 will cause ‘supply chain ripples for more than a year and 2) Shipowners may be ready for IMO 2020, but the bunker market is not
  • Freight Waves: 1) IMO 2020 credit risks to cascade across marine fuel supply chain and 2) To slow steam or not slow steam; that is the latest IMO 2020 question
  • Forbes, IMO 2020 Will Bring Higher Costs, More Volatility And Cleaner Air
  • Reuters, ‘Storm approaching’: firms fear for deliveries in shipping shakeup
  • MarineLink, Preparing for IMO 2020: Marine Emission Solutions
  • The Visual Capitalist, IMO 2020: The Big Shipping Shake-Up
  • Hellenic Shipping News, New Study Finds Negligible Environmental Impact From Accumulated Scrubber Washwater In Ports
  • The Maritime Executive, Carnival: Scrubber Washwater is Safe for the Environment
  • Wall Street Journal, Shipowners Seek to Slow Services to Meet Emissions Limits
  • Marine Insight, A Guide To Scrubber System On Ship

 

 

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