Drewry says futures indicate low-sulfur marine fuel prices may rise 55 percent when IMO 2020 mandate kicks in.
A new survey by Drewry Supply Chain Advisors has found widespread concern among shippers and forwarders about a lack of transparency as to how fuel costs are calculated as the International Maritime Organization’s global sulfur emissions cap approaches.
When the cap kicks in on Jan. 1, 2020, shipowners will either have to power their vessels globally with fuel with less than 0.5 percent sulfur or equip their ships with scrubbers to remove sulfur oxide from engine exhaust. (Carriers will have to continue to use, as they do today, even cleaner fuel with a maximum sulfur content of 0.1 percent in so-called emission control areas, for example, within 200 miles along much of the coast of the United States and Canada. And a small number of shipowners are planning to repower their ships with liquefied natural gas, but that requires expensive modification to ships and new fueling facilities, which have not been built in most ports.)
The cleaner bunker fuel most carriers are likely to use is expected to be much more expensive, and Drewry said the level of uncertainty about the total cost impact of the new IMO regulation “is so large that nobody is able to provide a confident forecast of the cost of compliance; the only certainty is that the extra cost will run into billions of dollars globally come 2020.”
“Based on independent ‘futures’ prices, low-sulfur marine fuel prices per tonne will be 55 percent higher than current high-sulfur fuels and Drewry considers that the probable ‘worst-case’ scenario is that fuel costs (paid by carriers) and fuel surcharges (paid by shippers) in global container shipping will increase by 55 percent to 60 percent in January 2020.”
Drewry said that its survey and follow-up interviews with respondents found 56 percent stating they did not consider their service providers’ existing approaches as either fair or transparent.
It added that 76 percent of the shippers/beneficial cargo owners it surveyed said they had not received clarification or information from their provider as to how they intend to cover potential cost increases from the regulation.
Philip Damas, head of Drewry Supply Chain Advisors, said “Given the scale of the extra costs triggered by the new regulation and the carriers’ expectations that their pricing and fuel charge mechanism with customers must be restructured, there is a need for carriers to address the transparency concerns expressed by their customers.
“Drewry has built an independent IMO cost-impact calculator tool which we are trying to refine by working with both shippers and carriers,” he said.
Damas noted that the survey was done before announcements last month by Maersk, MSC and CMA CGM about bunker costs and the new IMO rule.
On September 17 Maersk issued a detailed press release and statement on how it will calculate bunker charges and said it will start using the new formula in January 2019, a full year before the IMO sulfur cap goes into effect in order to give shippers time to familiarize themselves with Maersk’s new approach.
Maersk’s new bunker adjustment factor (BAF) will be calculated by multiplying average fuel price in key bunkering ports around the world with a “trade factor.” The trade factor “reflects the average fuel consumption on a given trade as a result of variables like transit time, fuel efficiency and trade imbalance,” Maersk explained.
The trade factor will have a large impact on the size of the BAF. For example, Maersk said if the price of bunker fuel was $500 per tonne, the BAF tariff on a standard 40-foot dry container would be $488 for a shipment from the Far East to the U.S. West Coast; $113 from the U.S. West Coast to the Far East; $600 from the Far East to North Europe; and $350 from North Europe to the Far East.
The website Ship and Bunker said the average global bunker price Friday was $520 per metric tonne. Maersk gave examples of what the BAF would be for fuel prices ranging from $400 to $700 per metric tonne.
“The point that carriers do not provide factual fuel consumption data and fuel cost data to explain the level of the BAFs remains an issue to be addressed,” said Damas, “particularly if carriers are to introduce much higher low-sulfur BAFs from 2020.”
Drewry said fuel surcharges are one of the largest components of container freight costs and, based on Drewry Benchmarking Club data, typically average $150 per TEU on the major routes from Asia today.
Maersk’s announcement was followed by statement from Mediterranean Shipping Company that said it also planned to introduce a new global fuel surcharge on January 1, 2019 “in order to help customers plan for the impact of the post-2020 fuel regime.”
Maersk and MSC both said they thought the extra fuel cost for each of their companies would be $2 billion.
CMA CGM said it will favor the use of low sulfur fuel for its fleet, it will use LNG to power nine ships it has on order and has ordered several scrubbers for its ships.
“All these measures represent a major additional cost estimated, based on current conditions, at an average of $160 per TEU,” it said.
Maersk said “external sources estimate the additional cost for the global container shipping industry to comply could be up to $15 billion.”
Various groups representing shippers and forwarders have pushed back against the new bunker charge announcements.
Robert Keen, director general of the British International Freight Association (BIFA), the trade association for UK freight forwarding and logistics companies, said “While the shipping operators may say that the new BAFs are needed to cover the cost of switching to low sulfur fuels or fitting exhaust ‘scrubbers’, rises of this magnitude are unjustified and could be construed as blatant profiteering by shipping lines determined to exploit the situation.”
He said his group “would also prefer any increases that are necessary to be consolidated within freight rates and with any required fluctuation being managed against that figure.”
The European Shippers Council said it was calling for a “dialogue with container liners to find the best mechanism to share the costs.”
The Global Shippers Forum complained about the way the Maersk trade factor “upscales the costs on head trades and discounts the fuel cost on reverse trades.” It said “this has the effect of applying higher than average surcharges on their most profitable routes.”
However, Jacob Sterling, the head of product and change management for Maersk told Lloyd’s List that the aim of his company’s BAF is “cost recovery, nothing more, nothing less.”
MSC also said its new global fuel surcharge will “reflect a combination of fuel prices at bunkering ports around the world and specific line costs such as transit times, fuel efficiency and other trade-related factors.”