IMO Regulations: Cost On Shipping Industry Expected To Escalate By $15 Billion

628 views | Akanimo Sampson | December 18, 2019

Maritime experts have warned that the global container shipping industry is expected to witness a cost rise of $15 billion. This is with the International Maritime Organisation (IMO) 2020 regulation just around the corner.

A Senior Analyst-maritime supply chain at Drewry Shipping Consultants, Vishal Kashav, says a new component called Low Sulphur Surcharge (LSS) will be added to the freight rate when ships start using cleaner fuel.

Drewry is, however, a leading independent provider of research and consulting services to the maritime and shipping industry, employing over 100 professionals across an international network of offices in London, Delhi, Singapore, and Shanghai.

According to Kashav, ‘’LSS on the busy Asia-Europe trade route would be $250 for the forty-foot container, while on the Far East to Indian ports, it would be $100 for the same, taking total freight rate up by the same quantum.’’

IMO has mandated that sulphur content in shipping fuel must be reduced to 0.5 percent from the current 3.5 percent starting this coming January 2020.

The body has laid out this mandate due to high sulphur emissions that have caused damage to the marine environment, especially in Northern European countries, with the United Kingdom suffering the most.

IMO2020 regulations compel shipping companies to either fit scrubbers or use cleaner fuel for its fleet. Scrubber equipment is fitted to clean fuel on the ship. It is a one-time cost and an alternative to clean fuel usage.

APM-Maersk, Mediterranean Shipping Company (MSC), China Ocean Shipping Company (COSCO), CMA-CGM, Hapag-Llyod, Ocean Network Express (ONE), Evergreen Line, Yang Ming Marine Transport, Hyundai Merchant Marine, Pacific International Lines (PIL) are among the top 10 container shipping companies in the world.

Global players such as Maersk and France-based CMA-CGM are present in India’s container shipping market.

Managing Director at Maersk South Asia, Steve Felder, said ‘’in order to recover the increased costs, we have introduced two mechanisms for our customers, the Environmental Fuel Fee (EFF) for short-term contracts (less than three-months) with effect from December 1, 2019, and Bunker Adjustment Factor (BAF) for long-term customers to be effective from January 1, 2020.’’

The company has already established joint initiatives with Vopak, Koole and PBF Logistics for 0.5 percent compliant fuel storage and processing facilities in Rotterdam, Netherlands and New Jersey in the United States.

The EFF and new BAF levels will vary by trade route corridor, based on a transparent formula, he said. The freight hike is purely dependent on fuel price and will vary as long as the fuel prices vary.

Also, shipping being a low margin business, the industry cannot absorb the additional costs resulting from the new IMO 2020 regulations, and Maersk therefore intends to pass it on increase in cost to the customers entirely, said Felder.

State-owned Shipping Corporation of India (SCI) is also present in container shipping business but it contributes only 5 percent to the company’s total revenue.

‘’The retrofit scrubber cost is being priced at $4-$5 million per very large container ship. Retrofit scrubber would mean ships that are already active and need to undergo scrubber fitting immediately. Alongside, for a new built container vessel the cost is comparatively less around $3 million’’, said Kashav from Drewry.

Meanwhile, Indian shipping companies such as Essar Shipping, Shipping Corporation of India (SCI) and Great Eastern Shipping among others, which are largely in bulk trade of both dry and liquid, are looking to have a combination of scrubbers clean fuel option depending on their cost calculations.

“We are installing scrubbers on seven of our larger ships and the total cost of installation on these ships is around $20 million. For the rest of the fleet, we will just switch to the low sulfur fuel oil/marine gas oil (LSFO)/(MGO) from Jan 2020. Installation on one ship is already done, the rest will be done by Jan/Feb 2020,” Great Eastern Shipping official said via email responses.

The company has a fleet size of 47 vessels and is after state-owned Shipping Corporation of India with a fleet size of 60 vessels. SCI has a small presence in the container segment with five vessels in its kitty.

Executive Director and Chief Executive Officer of Essar Shipping, Ranjit Singh, said ‘’we are installing scrubbers and will make capital investments of about $6 million in four out of our 12 owned vessels. Rest has been lined up for installation of scrubbers.’’

While cost rise for shipping companies in inevitable from January, analysts were of the view that actual global freight rate hike could remain pressured in select regions.

An analyst who did not want his name on print said, ‘’overall freight rates will surely go up but the East-West trade routes could witness some pressure due to lower trade growth because of the US-China war, higher competition and overall weak demand due to global downturn.’’

Adding, he said comparatively, intra-Asia and North-South trade routes that are smaller routes but have trade growing due to the presence of developing economies such as India, Iran, and Russia among others will see a higher quantum jump in freights.

While the US represents the largest market for container shipping followed by Canada in North America, in Europe, Germany, the UK, Spain, Italy, and France hold the major share of the container shipping market.

But, in Asia, with manufacturing units on a rise, demand for containerized cargo is expected to go up just like Japan, China, and India are expected to be the fastest-growing container shipping market in this region.

Leave a Comment

The News Chronicle