OECD: Ocean carrier costs skyrocketing under new fuel regulations

Annual costs at container lines have increased a combined $500 million due to new sulfur emissions rules requiring vessels to use more expensive fuel, according to a report released last week by the Organisation for Economic Co-operation and Development.    Ocean carriers have seen annual costs skyrocket due to new sulfur emissions regulations requiring containerships to use more expensive fuel, according to a report released last week by the Organisation for Economic Co-operation and Development (OECD).
   Under the new rules, which went into effect in January 2015, ships sailing through so-called Emissions Control Areas (ECA) are required to use fuels with less than 0.1 percent sulfur content, down from 1 percent previously.
   ECAs, as laid out in the International Convention for the Prevention of Pollution from Ships (MARPOL), currently cover coastal areas on both sides of the United States and Canada, including Hawaii and the Great Lakes, as well as the Baltic Sea in Northern Europe, and could be expanded to Mexico, Scandanavia, the Mediterranean and Southeast Asia in the coming years.
   The OECD report estimates the requirements have increased annual costs for container lines by a combined $500 million at a time when overcapacity, weak demand and plummeting freight rates have already taken a huge toll on carrier profitability. Those rising fuel costs have, however, been mitigated by the precipitous fall in the price of crude oil, which has brought fuel costs down across the board.
   By 2020, MARPOL would reduce the sulfur content limit for all vessels — not just those operating in ECAs — to 0.5 percent, which could add total annual costs of anywhere from $5 billion to $30 billion for the container shipping industry, the report said.
   “We will assume that container shipping lines have limited possibility to absorb cost increases, so they will likely transfer these to their customers,” the OECD warned.
   OECD estimates a global sulfur cap of 0.5 percent in 2020 would increase shipper costs for transporting agricultural goods by as much as 7.5 percent, manufactured goods by 3.5 percent and industrial raw materials by 16.4 percent.
   World Shipping Council Senior Advisor Christopher Koch said last November previous ECA sulfur regulations “pale in comparison to the impact of the MARPOL Annex VI requirement to end the global shipping industry’s current use of heavy fuel oil and to mandate a maximum 0.5% sulfur fuel globally.” He estimated the cost would be even greater than the high range of the OECD analysis.
   “This will be the single most expensive environmental regulation the shipping industry has ever faced, Koch told the Pacific Transportation Association at a conference in Oakland, Calif. “Regardless of whether the IMO retains the effective date of this requirement as 2020 or moves it to 2025 (as it may), the estimated cost impact of switching from heavy fuel oil to a 0.5% sulfur fuel on a global basis could be $75-$100 billion annually.”
   Industry analysts and container lines have cautioned that a lack of proper enforcement and the increased costs could encourage some carriers to ignore the regulations altogether. According to the OECD report, fines resulting from enforcement of the sulfur emissions standards rarely surpass the cost implementing lower sulfur fuel.
   “Considering the significant costs to the shipping industry, effective enforcement is of utmost importance to guarantee a level playing field,” OECD said.