IMO Sulphur 2020 – Impacts to Operators, Shippers and Global Freight Markets
By Derek Langston, Simpson Spence Young
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.
The second option, the installation of scrubbers, removes sulphur from the exhaust on board the vessel, enabling HSFO to continue being burned. The most prevalent design, the open loop, involves sea water being sprayed on the exhaust gases, which is then discharged into the sea (where alkaline sea water neutralizes the acid). Closedloop systems are preferred for waters with low alkalinity, such as the Great Lakes or the Mississippi River. This system uses caustic soda (or an alkaline alternative) and though it involves less power to operate than open-loop designs, it requires waste reception facilities at the port. A hybrid design allows flexibility and may be chosen if an owner believes future requirements will target washwater discharge into the ocean from open-loop systems. Indeed, bans on washwater discharge in the port waters of California, China, Fujairah and Singapore, among others, effectively mean vessels fitted with open-loop scrubbers will have to use compliant fuels when in port waters.
The attractiveness of scrubbers as a method for IMO 2020 compliance very much depends on the payback time. With installation costs reported at $2 million for a 200-210,000 dwt “Newcastlemax” bulker newbuilding and more for a retro-fitting, a premium of $200/t of VLSFO over HSFO (per recent futures pricing for 2020), if realized, would imply a payback on installation for a Baltic Exchangetype Capesize of more than one year. Scrubbers would, therefore, be most favored for modern, higher value, high fuel-consuming vessels – those with the shortest payback periods – and we do expect more scrubbers to be fitted to Capes on order.
We assume by March 2020 some 20- to 25 percent of Capes on the water will be scrubberfitted with smaller percentages of the Panamax and Supra/Ultramax fleets. With the majority of the dry bulk carrier fleet not scrubber-fitted by 2020 (and facing the prospect of higher bunker prices), we predict a rise in demolition activity during late 2019 and 2020 for older, less economical ships. The most economical ships may attract a premium for period rates, and some older vessels may slow steam to remain competitive, reducing fleet carrying capacity further and tightening market balances. In addition, anticipated bottlenecks in the supply of compliant fuels could add significant waiting time at key bunkering centers as well as bottlenecks in the supply of bunker barges.
The third option, alternative low sulphur fuels such as LNG, has yet to achieve mainstream uptake in the dry bulk sector due to a lack of bunkering infrastructure. There are very few current examples of LNG-fuelled dry bulk carriers either on the water or confirmed by new building orders.
Non-compliance with the new rules will be permitted only if vessels’ detailed actions to attempt to obtain compliant fuel and specifying reasons why compliant fuel was not available are made in a Fuel Oil Non-Availability Report (FONAR). Otherwise, breaches of IMO 2020 face penalty by port states in port waters or by flag states out at sea. Furthermore, a ban on the carriage of HSFO unless a certificate proves the existence of a working scrubber will become effective on March 1, 2020. This would prevent HSFO consumption at sea and close a potential loophole.
While care has been taken to ensure that the information in this article is accurate, it is supplied without guarantee.
SSY Consultancy and Research Ltd. can accept no responsibility for any errors, omissions or consequences arising therefrom.
The views expressed are those of SSY Consultancy & Research Ltd. and do not necessarily reflect the views of any other associated company.
Derek Langston is the Head of Research at Simpson Spence Young.