On January 1, 2020, a set of emission standards created by the International Maritime Organization (IMO) will take effect. These regulations, which limit sulphur oxide (SOx) emissions from all ships, aim to create global health and environmental benefits, especially for populations who live in proximity to ports and coastal areas.
In order to meet these new standards, steamship lines will need to make changes to 1) the fuels they use and/or 2) the equipment they operate. The global consulting firm AlixPartners estimates that these changes could cost the shipping industry as much as $10 billion. Furthermore, they estimate that this could result in fuel surcharges ranging from 33-40%.
How will IMO 2020 affect your business? There are still several unknowns, so it’s impossible to predict with full certainty at this time.
However, to prepare for the coming changes, we’ll walk you through what we know right now. We’ll start with a few top-line impacts:
- Although many questions remain, it’s likely that the demand for low-sulfur fuel will rise and the market will tighten, resulting in additional fuel surcharges in the coming year. As a result, the overall costs associated with ocean freight will likely rise.
- As part of their effort to control costs through fuel usage, steamship lines may use techniques like slow steaming—running ships at lower speeds to use fuel more efficiently. This could result in longer transit times, which would affect supply chains globally.
Ultimately, the best thing you can do right now is to understand the coming changes and talk with your freight forwarder about how to plan for them in 2020.
By taking these simple actions, you’ll stay ahead of the curve. In fact, many organizations haven’t yet taken these steps. A recent study by Logistics Management revealed that 90% of their readership, mainly composed of logistics professionals, had “little to no awareness” of IMO 2020. 80% have done little to no planning or analysis of the potential ripple effects for domestic transportation.
In this article, we’ll walk you through the major issues so you can understand what “IMO 2020” means—and how you can start to think about your planning process for 2020.
Let’s start from the beginning.
Who Is the IMO?
The IMO is a specialized agency of the United Nations. It’s responsible for the safety and security of shipping and the prevention of marine and atmospheric pollution by ships.
IMO: International Maritime Organization, a specialized agency of the UN, responsible for regulating all aspects of international shipping: ship design, construction, equipment, manning, operation, and disposal.
The IMO defines its main role as creating “a regulatory framework for the shipping industry that is fair and effective, universally adopted and universally implemented.”
This is especially critical, considering that international shipping moves more than 80% of all global trade. The IMO considers shipping the most “dependable, low-cost means of transporting goods globally.”
What’s Changing on January 1, 2020?
As of January 1, 2020, the limit for sulphur in fuel oil used to power ships will be reduced from 3.50% to 0.50% m/m (mass by mass). This change will significantly reduce sulphur oxide emissions, creating significant impacts:
- Burning standard bunker fuel (Heavy Fuel Oil or HFO) accounts for almost 90% of a sulfur emissions globally, according to a Goldman Sachs study, with the largest 15 vessels producing more sulfur than the combined total of all the world’s automobiles.
- Sulphur oxides (SOx) are known to be harmful to human health, causing respiratory symptoms and lung disease. A 2016 study on the impact of sulfur oxides estimates that these new regulations will prevent 570,000 premature deaths through 2025.
- Sulfur oxides in the atmosphere can contribute to acid rain, which can harm crops and forests, as well as contribute to the acidification of the oceans.
These regulations aren’t entirely new. IMO regulations to reduce sulphur oxide emissions started in 2005, under Annex VI of the International Convention for the Prevention of Pollution from Ships, also known as the MARPOL Convention. The upcoming January 1 deadline represents an additional tightening of previous sulphur oxide limits.
How Will the Shipping Industry Respond? And How Will This Affect Shipping Rates?
To comply with the IMO mandate, shipping lines can take the following actions:
- Use low-sulphur fuel oil with less than 0.50% m/m
- Use an alternative fuel, such as liquid natural gas (LNG)
- Use heavy fuel oil with an Exhaust Gas Cleaning System (EGCS)
Exhaust Gas Cleaning System (EGCS): Also known as a “scrubber.” A system designed to remove components, such as sulfur oxides, from ship emissions before they get released into the atmosphere
Although the steamship lines’ full responses remain to be seen, Breakthrough, a supply chain and fuel advisory management firm, estimates that 70-80% of carriers will simply purchase low-sulfur fuel. They also estimate that 10% will implement scrubbers—which means pulling vessels out of the water for a retro-fit—and even fewer will choose alternative fuels.
These changes will come at a cost to steamship lines. Maritime research consultancy Drewry is expecting IMO 2020-compliant fuel to be 50% more expensive. Although fuel suppliers are currently ramping up supplies of low-sulfur fuels, experts are anticipating a shortage in the near term, which will drive up prices. However, over the long term, prices are expected to stabilize, once supply of low-sulfur fuel catches up with demand.
Currently, the industry is anticipating that shipping lines will pass these costs along in the form of fuel surcharges. Consulting firm AlixPartners anticipates that steamship lines will need fuel surcharges ranging from 33% to 40%, depending on their routes, to make up for the additional costs.
Fuel Surcharge: A surcharge used by a shipping line to offset the changing costs of their fuel. Also called a “Bunker Fuel Surcharge” or a “Bunker Adjustment Factor.”
Currently, Matson and Pasha have committed to giving the industry 30-day notice for changes in fuel surcharges. This means they’ll likely release fuel surcharge information for 2020 on December 1, 2019. Approved customers can expect to receive notice as soon as we hear from the steamship lines.
Areas that rely heavily on ocean freight, such as Hawaii, Guam, Puerto Rico and Alaska, are likely to see significant impacts in shipping costs as a result:
- Shippers can expect to see frequent fuel surcharge changes in the early weeks of 2020 as steamship lines and refiners adjust to the changes.
- Wholesalers and retailers need to be prepared to adjust prices with agility in the coming months, in order to cover increased shipping costs.
- Consumers may also see pricing impacts as the price of the fuel surcharges are passed down from the steamship lines to wholesalers and retailers.
What Can I Do Now to Prepare?
First and foremost, talk to your freight forwarder. They have likely started these conversations with the steamship lines they work with frequently. If your forwarder has a good grasp of your supply chain (and they should!), they’ll be a good first point of contact to help you start planning.
Additionally, consider the following:
#1: Prepare to React to Changes in Your Supply Chain
One of the methods that steamship lines are considering in order to reach to this change is slow steaming.
Slow Steaming: Reducing the average speed of an ocean vessel to reduce fuel consumption.
Steamship lines have used this tactic in the past to deal with past spikes in fuel costs. The advantage? It might result in less dramatic fuel surcharges. The disadvantage? It increases transit times, which also means increased inventory carrying costs and longer restocking times.
Recommendation: If slow steaming does become a reality, you’ll need to adjust your supply chain accordingly. Start now by talking to your freight forwarder about potential alternatives, and consider adjustments to ensure you have the raw materials and the inventory you need to keep your operations running smoothly. You might even consider making some changes in your supplier networks to adapt to these changes.
#2: Investigate Other Modes of Transportation
In the past, air freight might not have been an option you’ve considered. However, potential fuel surcharges could make air freight a viable choice for you, especially if:
- You’re shipping high-value items.
- You use deferred service, which offer the lowest rates since your goods wait for space on a scheduled flight on the third, fourth or fifth business day.
Recommendation: Talk to your freight forwarder to investigate whether some of your shipments might be better suited for a mode like air freight.
#3: Get a Close Handle on Your Supply Chain
January 1, 2020 will bring a number of changes to the logistics and transportation industry. Companies who have a strong grasp on and insight into all the links of their supply chain will be better positioned to make the agile decisions that these changes may require.
Recommendation: Your freight forwarder can be an invaluable partner to you in this process. Talk to them about your concerns and look for their help in optimizing any weak links in the weeks leading up to the January 1 deadline.
Have More Questions?
Our experts would be happy to help. We can strategize with you about the impact IMO 2020 may have on your business. We can also help you start to make the adjustments you need to keep your supply chain moving forward and control costs as surcharges begin to take effect.
Just get in touch with us to schedule a time to talk. Additionally, look for additional resources from Approved as we get more information closer to the January 1 deadline.