Sulphur Cap 2020 – Impact on Shipping Companies, Freight Rates

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(Image Courtesy: Safety4Sea)

Within two years it will be illegal to power a ship with fuel having more than 0.5% sulphur content, unless the vessel is fitted with an exhaust clean gas system, known as a scrubber. However, Swedish financial services group SEB has estimated that fewer than 2,000 ships out of the global fleet of some 60,000 (3.3%) are expected to have scrubber systems installed by January 1, 2020.

Emissions

A ship is said to emit around 50 times as much sulphur as a modern lorry per metric ton of cargo, while of total global air emissions, shipping accounts for 18 to 30% of the nitrogen oxide and 9% of the sulphur oxides, in addition to carbon dioxide and carbon particulate matter.

An article in the Daily Mail suggested that the largest ships can each emit as much as 5,000 tons of sulphur in a year, same as 50 million cars, each emitting an average of 100 grams of sulphur annually. With an estimated 800 million cars driving around the planet, 16 big vessels can emit as much sulphur as the world fleet of cars.

(Image Courtesy: Wallenius Wilhelmsen Logistics)

High-Sulphur Fuel and LSFO

This high-sulphur fuel — or bunker fuel as it’s known — is the dirtiest residual combustible material left over in refineries. When burned, it releases plumes of black smoke, familiar to anyone in a port area watching a large container or cruise liner leaving a haze over the port area.

SEB adds that despite the significantly higher cost of low-sulphur fuel oil (LSFO) (currently about USD 580 per tonne) compared with heavy fuel oil (HFO) at about USD 370 per tonne, shipowners are resisting calls to install scrubbers. IMO rules currently allow ships to burn fuel containing up to 4.5% sulphur.

Scrubbers or LSFO

A Financial Times article said that only 2,000 of the 18,000 vessels that carried crude, dry cargo and other container ships would have scrubbers installed by 2020. Together, they consume close to 4 million barrels a day of what is known in the industry as high-sulphur fuel oil. So, the rest will seek to be fuel-compliant, switching to low-sulphur derivatives. “The key reason is that generally it is the charterer who indirectly pays for the fuel as a pass-through cost. It is much easier to pass on a specific fuel cost than to demand compensation for capex spending on scrubbers,” SEB stated.

Almost all European and North American refineries can produce low-sulphur fuel oil and not be left with unsaleable waste. But refiners are not going to miss the opportunity to raise margins from the switch to higher grades; indeed, the process has already begun. In the European Union, the rule change will raise refining margins by an average of 60 cents, to USD 8.10 per barrel in 2020, JPMorgan is quoted as saying by Bloomberg.

Freight Prices to Shoot Up

The fuel shift is already starting to appear in futures prices. In Europe, the premium that low-sulphur fuel oil attracts over its dirtier counterpart in January 2020 has grown by 66% since the start of the year, according to Bloomberg.

The SEB, quoted by the Financial Times, agrees, reporting the 2020 high-sulphur fuel oil to gas oil price spread traded at USD 220/metric ton on a forward basis in the early autumn of 2017. Then it blew out to as much as USD 350 at the start of 2018 and SEB expects a further widening to USD 450 later this year. With half the variable costs of a shipping line taken up by fuel, this heralds a rise in global freight rates as we near 2020 and shipping lines are required to pay for low-sulphur fuel oil.

Shipowners opined that they intend to be fully compliant and use LSFO in their vessels because it provides more free space, less maintenance and lessens the demand of a competent crew. Besides, there is uncertainty surrounding sludge disposal costs.

On the other hand, the major container shipping firms rely on the charter market for a high share of their fleet. For example, CMA CGM charters 62% of its capacity and MSC 66%, and if shipowners won’t pay the USD 5 million – USD 10 million cost of installing scrubbers, the charterers will be obliged to manage for the higher operating costs of using LSFO.

(Image Courtesy: Cambiasorisso)

Feasibility Metrics’

Some of the world’s biggest commodities traders have warned that the shipping industry is ill-prepared for sweeping environmental regulations that take effect in 2020. Given that an ultra-large container vessel burns about 250 tonnes of fuel a day, the additional cost will be huge. According to S&P Global Platts, it is estimated that if the global container fleet were to switch overnight from HFO to LSFO, the extra cost would be a staggering USD 34 billion a year, based on the current prices.

(References: Financial Times, The Loadstar, MetalMiner, Bloomberg)

Sea News Feature, March 29