Ocean carriers guiding expectations on rates as one of the biggest changes to shipping set to hit in 2020.
CMA CGM and Mediterranean Shipping Company became the latest ocean carriers to outline expected costs from the pending move to lower shipping’s sulfur emissions, with the new rule forecast to add, respectively, $3 billion and $2 billion in extra costs to the lines.
The announcements come 15 months prior to the official start of rules from the International Maritime Organization that require fuel’s sulfur emissions to go from 3.5% down to 0.5%.
Privately held CMA CGM and MSC join the growing raft of companies including Maersk (Nasdaq OMX: MAERB), Hapag-Lloyd (Frankfurt: HLAG) and others that have been guiding customer and investor expectations about how the 2020 sulfur regulations will impact business.
CMA CGM plans a multi-prong approach to meeting the standards. Along with using low-sulfur marine fuel once available, CMA CGM will use liquefied natural gas to power some of its large ships and to use on-board sulfur scrubbing technology, which will allow it to continue using high-sulfur marine fuel.
But the higher costs of low-sulfur fuel and the investment in LNG engines and scrubber technology “represent a major additional cost, estimated, based on current conditions, at an average $160” per twenty foot equivalent unit (teu).
The extra $160 would represent a 14% increase over the roughly $1,114 per teu in gross revenue the company reported last year. CMA CGM said it plans to recoup those costs through fuel surcharges on a “trade-by-trade” basis.
“The implementation of this new regulation, which represents a major environmental advance for our sector, will affect all players in the shipping industry,” said CMA CGM vice president Mathieu Friedberg. “In this context, we will inevitably have to review our sales policy regarding fuel surcharges.”
MSC did not list out the expected per-teu cost of meeting the new rules, but it says its “operating costs are expected to increase significantly as we continue to prepare for the 2020 low-sulfur fuel regime.”
MSC said it is looking at $2 billion in extra costs to comply with the new fuel rules.
It says it will introduce a global fuel surcharge at the start of next year “to help customers plan for the impact of the post 2020 fuel regime.” It plans to use a combination of fuel costs and trade-specific factors to calculate the surcharge.
The Organization of Petroleum Exporting Countries (OPEC) said in a recent report that the 2020 rule will push maritime demand for high-sulfur fuel oil down to 1.2 million barrels per day by 2020, down from a current level of 3 million barrels per day.
OPEC expects only about 2,000 of roughly 60,000 commercial ships on the water will have installed the sulfur scrubbers need to keep using high-sulfur fuel oil past 2020. But the prospect of lower cost fuel will mean scrubber uptake could rise to 5,000 vessels by 2023.