IMO2020 Overview


IMO2020 Overview.

Delivering supply chain success. 


IMO 2020 Overview


The start date of IMO 2020, 1 January 2020 is fast approaching. IMO 2020 is a new global regulation that mandates shipping lines significantly reduce the Sulphur content of the fuel used by their ships. In this post, we will share some background on IMO 2020, why it has come about, what are the options for shipping lines to comply and how it is likely to impact companies that import and export.


Why has IMO 2020 come about?
 

Ocean shipping has always been the mode of choice for businesses looking for both a low-cost and low-carbon mode. The emissions from ocean shipping are much less than air freight when looking at the amount of CO2 (in grams) emitted per metric ton of freight and per km of transportation. A modern airplane emits 500 g per metric ton/per km versus 10-40 g for ocean shipping.


While the lower emissions from ocean freight are better than air freight, when you consider the overall volume of emissions from the 59,000 cargo ships globally, the numbers pile up. Researchers have estimated the global cargo fleet travelling annually burns more than two billion barrels of heavy fuel oil per year. This fuel contains Sulphur concentrates up to 1,800 times higher than the diesel burned by vehicles in the USA. Two hundred of the world's largest ships emit the Sulphur dioxide pollution equivalent to 1 billion cars.


How do the emissions from cargo ships impact our environment and human health?


The Sulphur-related pollution caused by ships causes around 400,000 premature deaths from lung cancer and cardiovascular disease annually, and approximately 14 million cases of childhood asthma a year to name just a few. Emissions from cargo ships also contribute to acid rain in Europe.

 

After the implementation of IMO 2020, there is projected to be a 77% drop in overall Sulphur oxide (SOx) emissions from ships which equates to an annual reduction of approximately 8.5 million metric tonnes of SOx. This drop will reduce shipping's negative effect on human health through air pollution. Premature deaths will be avoided, and there will be an overall reduction in stroke, asthma, cardiovascular disease, lung cancer and pulmonary disease. The health benefits will be felt globally with the most substantial impact being on coastal communities.

 

Background on IMO 2020


The International Maritime Organisation (IMO) is the United Nations specialized agency with responsibility for the safety and security of shipping and the prevention of marine and atmospheric pollution by ships. IMO measures cover all aspects of international shipping – including ship design, construction, equipment, manning, operation and disposal – to ensure that this vital sector remains safe, environmentally sound, energy-efficient and secure.

 

Back in 2008, the IMO 2020 date was set as part of progressively stricter regulations on emissions. IMO 2020 stipulates that the Sulphur content of the fuel oil used in ships drop from 3.5% mass/mass (m/m) to 0.5% m/m. As part of this, it was agreed that by 2018 a review should be undertaken to determine whether sufficient compliant fuel oil would be available to meet the 2020 deadline. In 2016, this review was completed, and it confirmed that enough compliant fuel would be available to support the 1 January 2020 implementation date.

 

What are the options for shipping lines to comply?


There are three main ways shipping lines can comply with IMO 2020:

  • switch to low-Sulphur fuels that have a content of 0.5% Sulphur or lower (which is much more expensive than the high-Sulphur fuels used today);
  • install a "scrubber" or other technology that takes out the Sulphur particles and other particulate emissions; or
  • invest in alternate-fueled ships.


Each shipping line will determine individually how to comply, with most either switching to low-Sulphur fuels or installing scrubbers. Scrubbers are costly to install with prices ranging from USD 2-10 million per ship. Also, at this point, both Singapore and China have banned the use of scrubbers, which means that ships must burn low-Sulphur fuels while visiting these countries. There is a perception that continuing to purchase high-Sulphur fuel and treating it on the vessel with scrubbers may be a more cost-effective option when compared to the use of more low-Sulphur expensive fuels.

 

How is this likely to impact shippers (importers and exporters)?


The environmental gains from IMO 2020 will, however, come at a cost. For example, some experts are suggesting the more expensive low-Sulphur fuels could add around $2.5 million to the cost of an Asia-Europe round trip. Scrubbers are a costly capital outlay as is retiring existing ships and replacing them. Realistically, there will be a flow-through of costs to shippers as shipping lines seek to recoup their costs.


At this point, we can only estimate how much rates will increase and when they will increase. Depending on trade lane, rates may increase between USD 125-175 per TEU. We are working with shipping lines currently to understand how much rates will increase and which charging mechanism they will be using to recoup their costs.  It is important to note that many shipping lines previously started separating the cost for fuel from the cost of the freight so they could adjust fuel in-line with the market. This 'Bunker Adjustment Factor' (BAF) is passed onto shippers as a separate and variable charge. In addition to potential increases in the BAF for shipments, some shipping lines may also increase their low-Sulphur surcharge (LSS). The increases will likely start as early as October or November as ships need to clean out their tanks in preparation for the 1 January 2020 start date.

 

We are here to help


A few months after implementation on 1 January 2020, it is anticipated that the price for low-Sulphur fuel will settle down and potential increases for shippers may drop slightly. But at this point, it is essential to be prepared for the extra costs. We will be supporting clients on two critical fronts during the transition, acting as an information resource for them, and proactively negotiating with shipping lines on their behalf.

 

If you have questions on IMO 2020 or would like to discuss the potential implications for your business, we are here to help. Contact us today for a free consultation to discuss your supply chain and how we can help your business manage the IMO 2020 transition.