The impact of the International Maritime Organization’s (IMO) low-sulfur requirements on ocean carriers will reverberate far beyond just carriers when it is brought into force on January 1, 2020. Although carriers will feel the initial brunt of the regulations, the low-sulfur requirement will also have a significant impact on the shippers who use ocean carriers as the primary mode to move their product to market.
What is the IMO low-sulfur requirement?
In 2005, the IMO passed regulations to limit the amount of Sulphur Dioxide (SOx) emissions from maritime vessels. The imposition of lower SOx emissions was in recognition that the high levels of SOx expelled into the environment by maritime vessels were a significant contributor to global respiratory health. As a result of the initial regulation, the levels of SOx emissions have been steadily reduced. On January 1, 2020, the new standard of 0.5% SOx emissions comes into effect for all maritime vessels. This is a major reduction from the 3.5% levels that are currently in effect and the impact on shippers will be meaningful and real. Some of the outcomes for shippers will be felt in the short term and will be directly attributable to the new regulations going into effect. Other outcomes are less obvious and need to be assessed in terms of the risk that can negatively impact the company’s supply chain.
What is the cost of the IMO’s 0.5% SOx requirement?
Ninety percent (90%) of all international product moves on maritime vessels. Ninety-six percent (96%) of all maritime vessels are not yet able to meet the IMO’s SOx requirements. These vessels require significant upgrades to meet the 0.5% emissions target. In an April 15, 2019 SupplyChainBrain article, Stephen Shou, the CEO of Maersk, estimates that the total cost to the container vessel industry will be upwards of $10-15B. The cost to the entire maritime industry could be upwards of $650B.The IMO’s new SOx requirement has serious implications for the global trading environment - well beyond the maritime carriers. It will directly impact internationally sourced product landed costs through increased transportation cost.
How will the SOx requirement impact global shippers?
Higher transportation cost
A direct outcome of the requirement to upgrade vessels to meet the new fuel efficiency requirement will be increased cost to shippers for transporting their products. All carriers will have the cost of upgrading vessels to either scrub current fuel or use the new lower emission fuels. Today, it is projected that only 2% of the entire ocean vessel fleet is able to scrub the fuel to meet the 0.5% levels. Because the time to upgrade the non-compliant vessels is too tight, most carriers will use the more expensive low-sulfur fuel, if they can get it. There is expected to be a 1,000,000 barrel a day shortfall in low-sulfur fuel availability in the first part of 2020. This fuel shortage will exacerbate the fuel cost in the short to medium term. The exact extent of the fuel cost increase is not yet known.The level of fines that will be levied against vessel operators by a “state” for non-compliance is also unknown. What is certain is that the direct, or indirect, costs associated with these upgrades will be passed on to shippers in whole or in part.
Increased Carrier Risk
The risk associated with maritime transportation is increased because of the new SOx 0.5% requirements. There are two (2) very real risk issues that shippers need to be aware of when selecting carriers.
- The first is the risk of bankruptcy that some carriers face as they try to absorb the additional cost associated with the new low-sulfur fuel restrictions. Shippers that experienced the Hanjin bankruptcy no only too well the disruption to business and finances that can occur when a carrier declares bankruptcy.
- The second is the inability of carriers to get insurance coverage for their fleets for failing to comply with the IMO requirements. The failure to get insurance or the increased cost of ensuring the vessels will put extra cost pressure on those carriers and potentially cause bankruptcy.
Both of these issues increase the risk for the carriers and shippers. How shippers approach this new situation can have serious implications for their future business.
A Shipper's response to IMO SOx Implementation
The IMO’s SOx requirements leave shippers with few options to mitigate the associated future costs and risk. It is difficult for global shippers to formulate a transportation strategy when so much of the fallout is not readily discernible. For large shippers, it is important to review your ocean carrier network to understand the implications of each carrier implementing SOx. Some of the larger Tier 1 carriers have already moved substantially forward to prepare for SOx. However, that being said even the largest carriers are exposed to significant additional costs. Those large carriers which have not been aggressive in preparing for SOx are seeing their financial risk exposure increase quite significantly. For second-tier carriers, the business risks increase rather dramatically.The situation becomes more difficult to manage when there are NVOs as the primary contractor between the shipper and the carrier. It is the NVOs carrier network that underlies the NVOs ability to ensure minimal risk.
- Shippers should take steps to independently review the financial status of carriers in their network
- Shippers should question their NVOs about their carrier network and understand what steps they are taking to ensure that their carrier network is agile and secure
- Shippers should question their NVOs about the contingency plans they have in place to secure them adequate space if the situation warrants
SOx represents a new level of complexity that shippers and transportation professionals must prepare to deal with. The uncertainty surrounding SOx is occurring in an environment that is already under constant shifting trade pressures. How a company implements transportation policies to deal with SOx may have far-reaching results on its future.