A senior shipping executive said there is still concern in the container shipping industry about whether there will be sufficient low sulfur fuel available for shipping lines to meet the International Maritime Organization requirement that starting on Jan. 1, 2020, ships use fuel with a sulfur content of 0.5% instead of the high sulfur bunker fuel with 3.5% sulfur widely used today, or install engine exhaust scrubbers.
Speaking during a panel discussion about the IMO 2020 regulation at the Intermodal Association of North America’s Intermodal Expo in Long Beach this week, Lawrence Burns, senior vice president of trades and sales at Hyundai Merchant Marine (HMM), said it is not clear whether compliant fuel will be available at all ports.
One possibility is that carriers will have to resort to buying even more expensive 0.1% sulfur fuel that today carriers use in so-called sulfur emission control areas (ECAs), he said. There is an ECA that extends for 200 miles from much of the coast of the U.S. and Canada. ECAs also exist in the Caribbean, North Sea and Baltic Sea and countries bordering the Mediterranean Sea are currently considering creating an ECA.
Burns said that it is also difficult to get a handle on just how expensive the 0.5% low-sulfur bunker fuel will be since it is still not available on the market.
Burns said carriers are concerned about whether they will be able to recover the cost of more expensive fuel or the scrubbers that some, like Hyundai, are installing at a cost of $5 to $8 million per ship.
If carriers are not able to recover their costs, he said, it could lead to reduced services.
In the same panel discussion, Laura Crowe, the director of Walmart Global Logistics, said the retailer tried to be fair in the contracts it negotiated with carriers earlier this year in recognizing the increased cost of fuel, but wanted to assure itself the charges carriers will impose are really designed to reimburse them for their higher costs and not a way to make additional profit.
In addition to trying to understand how much more expensive the low sulfur fuel would be, Walmart worked with lines to understand the switch-over process—when they would have to start cleaning tanks and getting ready for the switch to low sulfur fuel.
“We feel very comfortable with where we landed with our contracts,” said Crowe.
Burns said there was a big variation in how shippers have reacted to IMO 2020—“some naïve enough to say ‘I’m not paying’ and some that actually take responsibility and realize this is not just a carrier issue, but an industry issue. The majority realize this is an industry issue, not just in North America, but around the whole world.”
He said both importers and exporters have shown a willingness to address the issue and understand the charges.”
He said that while Hyundai has customized fuel surcharges for some very large customers, the same formula is used for most shippers.
Lars Jensen, the chief executive officer of SeaIntelligence Consulting, noted that the drone attack on the Aramco refinery in Saudi Arabia on Sept. 14 is said to have knocked out 5% global of refining capacity. But he said the attack could have an even bigger implication for IMO 2020 because damage to desulfurization units could reduce the ability to make clean fuels by an even larger percentage.
If a disaster such as the damage to the desulfurization units at the Aramco refinery made it impossible for ships to obtain fuel to meet the IMO 2020 regulation, Burns said, “I have to believe that our governments would kick in and relax regulations for a certain period of time.”
Sarthak Verma, senior vice president of International at J.B. Hunt Transport Services, said it is unclear what impact the increased bunker fuel costs as a result of IMO 2020 will have. The longer distance to ship cargo from many Asian destinations to the East Coast could result in some shippers deciding to route more Asian cargo to West Coast ports.
On the other hand, the price of diesel fuel needed to move cargo by rail and truck from the West Coast to the East Coast or inland destinations could also rise because of the need for more low sulfur bunker fuel.
He said J.B. Hunt was “fairly agnostic as to which direction freight flows.”
Burns said he did not believe the higher price of fuel would result in shippers seeking to “pull forward” inventory in the final months of this year, as they did in the face of threatened tariff increases in late 2018.
A slowdown in the world economy and more efficient use of fuel could reduce demand for fuel, said Verma, which is another factor that could blunt the impact of IMO 2020.
Various shipping trade organizations are urging strict enforcement of the IMO 2020 regulation. On Sept. 18, the World Shipping Council, BIMCO, Cruise Lines International Association, and the International Parcel Tankers Association, called on member states of the IMO to “fully implement” the new 0.5% sulfur cap.
“Recent reports suggesting that some nations might not fully implement the new rules are disturbing. Lack of full implementation would risk undermining improvements to public health and the environment,” said John Butler, president and chief executive officer of the WSC, the main trade organization for the container shipping industry.
Reuters had reported in August that Indonesia’s Ministry of Shipping said ships registered in the country will comply with the IMO rule after earlier saying more time was needed to meet the requirement.
Walmart’s Crowe said that if a company does not comply with the IMO regulation her company would view that as a contract violation.
However, she said the company might view the situation differently if none of the carriers in a particular trade lane are able to obtain low sulfur fuel.
While the switch over to low sulfur bunker fuel may be disruptive in the short term, at the end of the day Jensen questioned whether the increased cost of complying with the IMO 2020 regulation will have a major impact on the container industry.
He said bunker fuel currently costs about $450 per ton and that current indications are that low sulfur fuel will sell for $650-$700 per ton. From 2011-2014, he said standard bunker fuel sold for $700-$750 per ton.
During that that time “this industry operated perfectly well,” he said.