U.S. coal exporters face rising freight costs beginning Jan. 1, 2020, due to a change to a new global limit for sulphur in marine fuel of 0.5 percent from the existing 3.5-percent limit. Although the International Maritime Organization (IMO) has made previous adjustments to sulphur limits and lower limits are in place in several regions around the world, the new cap (known as IMO 2020) is far more ambitious than any previous measure, putting the entire maritime sector through unprecedented change. The risk of higher costs for U.S. coal exporters is twofold – higher bunker fuel costs and a potentially higher freight market due to constraints on the carrying capacity of the bulker fleet.
To comply with IMO 2020, shipowners can either:
- Switch from high sulphur fuel oil (HSFO) to 0.5 percent very low sulphur fuel oil (VLSFO), which is a new, and mainly blended, product, or to marine gasoil/diesel (MDO/MGO – the so-called “marine distillates”) with lower sulphur content of typically 0.1 percent; or,
- Continue using HSFO by installing exhaust gas cleaning systems (“scrubbers”) to lower SOx emissions; or,
- Invest in engines capable of burning low sulphur alternative fuels, such as LNG.
The first option, a migration to low sulphur fuels, will be the most widely adopted approach. Sizeable investments by oil refineries around the world have gone into producing compliant grades for the 2020 switchover. The key to overall shipping costs will be the new cost structure of compliant fuels.
Low sulphur alternatives such as MDO/MGO are already more costly. The price of MGO at the major bunkering hub of Rotterdam averaged $570/t in the first six months of 2019, a premium of around $180/t to the currently widely used HSFO.
The accompanying chart shows the bunker component of Panamax freight rates from Hampton Roads to Rotterdam, with the final shaded column showing an additional $1.40/t on the average July 2019 cost of the voyage rate if MGO is burned instead of HSFO. However, the premium for IMO 2020-compliant fuels may rise next year, given concerns over diesel availability in 2020 from the anticipated spike in demand, potentially adding to exporters’ freight costs.
Adding to the uncertainty, analysts’ forecasts of the composition of marine fuel consumption in 2020 differ substantially. The International Energy Agency (IEA) assumed in March 2019 that marine gasoil (MGO) consumption will more than double from this year to form the single largest source of marine bunker usage in 2020, at 2.0 million barrels per day out of a total global consumption of 4.4 million barrels a day (Mb/d) across the maritime industry. In contrast, OPEC predicted in September 2018 that 0.5 percent sulphur VLSFO will be the single largest marine fuel in 2020, comprising 1.5 Mb/d (up from 0.3 Mb/d in 2019).
Some regions already have sulphur standards lower than the new IMO 2020 requirements. In 2015, Sulphur Emission Control Areas (SECAs) with fuel limits of 0.1 percent sulphur were introduced in areas covering much of the North American coast, the U.S. Gulf/Caribbean Sea, and the North and Baltic seas. Consumption of marine gasoil/diesel (MDO/MGO) rose accordingly. For example, marine distillates increased to 14 percent of sales in Rotterdam during the period 2015-17 from less than 6 percent in 2014. Post-IMO 2020, SECAs will continue to function with their 0.1 percent sulphur limit.