International Maritime Organization 2020 Low Sulfur Mandate

Background

The emissions standards that are set by the International Maritime Organization (IMO) has decided to expand climate protection regulations to all of the world’s oceans. Effective January 1st, 2020, the upper limit of sulfur content will be 0.5% from current levels of 3.5%.

Bunker fuel expenditure accounts for a substantial portion of operating costs for ocean carriers and bunker price fluctuations typically have a delayed effect on expenses which depends on when the bunker fuel was purchased and when the fuel is actually consumed. In the container shipping industry, bunker consumption price is the most important factor that influences fuel costs where changes in the price of bunker fuel are correlated to the price of crude oil which is heavily influenced by economic and geopolitical factors.

Impact

To put into perspective, the cost of fuel for Hapag Lloyd’s ships amounted to 13.8% of the entire Group’s revenue in fiscal year (FY) 2018. The Group’s reported average consumption price (marine fuel oil and marine diesel oil) was US$421/ton in 2018 compared to US$318/ton in 2017. With bunker prices rising again since the beginning of 2019, it is likely to lead to an increase in fuel costs in 2019 even before the IMO mandate becomes effective. Similarly, OOCL has reported that bunker costs increased by 26% in the first half of 2018 compared to the same period in 2017.

The IMO’s 2020 mandate could lead to a sharp increase in fuel prices for ocean carriers which will ultimately, either wholly or in part, attempt to pass this increase in operating costs to the customer. In FY2018, only 13% of Hapag Lloyd’s bunker consumption was low-sulfur bunker.

Container Lines Fuel Recovery Surcharges

The container shipping industry estimates that the new low-sulfur fuel requirements will increase the industry’s annual fuel bill by US$10-15 billion. The attempt by ocean carriers to pass the bill onto customers has already begun in January 2019. CMA CGM, Hapag Lloyd, Maersk Line, MSC, OOCL and ONE has already revised their respective fuel recovery surcharges (bunker charges) in anticipation of the incoming sulfur cap. CMA CGM estimates that the use of low-sulfur fuel will increase costs by US$160/TEU where Hapag Lloyd estimates the increase to be US$100/TEU.

Bottom Line

It is widely expected that there will a spike in costs related to low-sulfur costs in the second half of 2019 as ocean carriers begin to use cleaner bunker fuel. The actual cost of low-sulfur fuel is still unclear but it is almost inevitable to see a rise in bunker costs and the overall cost of shipping in order for the industry to meet greener standards.