Carriers likely to pass low-sulfur fuel costs onto shippers

MARPOL Annex VI standards call for all marine diesel fuels to be subject to a 0.5 percent sulfur limit in 2020, or possibly 2025, pending completion of a review on the expected availability of the low-sulfur fuel, to be completed by the International Maritime Organization no later than 2018. The 2020 implementation date could be delayed to 2025 if the IMO determines there is insufficient compliant fuel available.

Potential cost increases from the MARPOL Annex VI fuel standard change in 2020.Potential cost increases from the MARPOL Annex VI fuel standard change in 2020.
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Whether the specific price differential proves to be lower or higher, the 0.5 percent global sulfur fuel standard represents the single largest regulatory cost increase experienced by the container shipping industry, according to the World Shipping Council.Gross estimates of additional fuel costs suggest that the industry will collectively pay $75 billion to $100 billion to comply with the 0.5 percent sulfur limit, derived from the maritime industry’s annual consumption of 250 million metric tons of heavy fuel oil and based on the differential cost of $300 to $400 per metric ton between heavy fuel oil and lower sulfur distillates, according to references from the World Shipping Council, BIMCO and International Chamber of Shipping. A lower estimate of $50 billion per year may be plausible if blending practices lead to a smaller differential of $200 per metric ton, although actual cost burdens will depend on future price changes for specific fuel blends as well as overall fuel consumption.

Using publicly available models provided by Maersk Line and the Transpacific Stabilization Agreement, the impact of fuel cost increases on container freight rates, assuming a differential of $300 per ton, could produce the following estimated cost increases:

― In the Asia-to-North Europe lane, the hike could be $500 per FEU based on TSA estimations, or $520 per FEU in the Maersk model.

― In the North Europe-to-Asia route, the increase could total more than $300 per FEU according to the TSA, or $330 per FEU according to Maersk.

― From the U.S. West Coast to Asia, the TSA model predicts a hike of $285 per 40-foot dry container and $420 per 40-foot refrigerated container. The Maersk model forecast $280 per 40-foot dry container.

― From the U.S. East Coast to Asia, the TSA model shows a potential increase of $555 per FEU and $765 per 40-foot reefer container, per the TSA, or $680 per FEU, per Maersk.

― The hike could be $240 per 40-foot container from North Europe to the U.S. East Coast, and $20 per 40-foot container from the U.S. East Coast to North Europe, according to Maersk. (The TSA model does not apply in this trade lane.)

Multiple container lines have announced low-sulfur fuel surcharges to offset costs from implementation of the IMO’s so-called emission control areas ― the Baltic Sea, the English Channel, the North Sea and 200 nautical miles from the American and Canadian coasts ― which will require carriers to switch to fuel with a sulfur content of 0.1 percent on Jan. 1, 2015, from the current 1.0 percent limit. Maersk, Mediterranean Shipping Co., Hapag-Lloyd and OOCL unveiled these surcharges this month.

DFDS, one of Europe’s largest short-sea shipping and logistics operators also recently announced plans to close a second route in response to the tougher environmental regulations because of their impact on fuel costs.

The looming low-sulfur fuel requirements are also prodding ocean carriers to consider alternative energy options. To comply, ships today have several options: use low-sulfur fuel when operating in ECAs, retrofit with sulfur oxide “scrubbers” on vessel exhausts (an option that has seen limited use) or install engines capable of burning liquefied natural gas. While carriers are currently considering LNG to power ships, some believe that the widespread use of LNG to power vessels is still a long way off as the practicality of using it is questionable.