The effects of the climate change do not stop at the sea freight industry and therefore many shipping companies feel obliged to contribute to it. Atlantic Forwarding feels the obligation to inform our business partners about the changes related to our industry timely.
Legislation
Regulations on reducing sulfur emissions are not new. They exist since 2012.
We already set regulations into practice, whereby shipping companies can use fuels with a sulfur content of max 3.5% but with a tighter sulfur cap of 0.1% in the so-called Emissions Control Areas (ECAs) around US, Canada, the North and Baltic Sea. By January 1, 2020, the new International Maritime Organization (IMO) regulation will enter into force, requiring carriers to use fuels with at most sulfur content of 0.5% (ECAs unchanged).
Consequences
The emission targets have massive impact in the market of the sea freight industry. Therefore, the shipping companies face the following consequences:
- New fuel: production of new fuel is required to reduce emissions, but the production is more expensive. In addition, this fuel is scarce. There are currently limited structural plans to increase global capacity, which may lead to a tight supply situation in 2019, as well as cost increasing effect.
- Conversion of ship engines: current vessels must adjust with the installation of scrubbers. There is not enough manufacturing capacity to build and install scrubbers timely to retrofit the existing global fleet. This may cause capacity tightness in the market in 2019 and 2020 as vessels need to be retrofitted with scrubbers in 2019 or might have to be laid up in case not retrofitted before 2020.
Impact on market
The market price will be determined by the distribution of shipping companies opting for a low sulfur content or for new fuel or ship conversion (scrubbers) and the availability of both solutions.
Due to the reduction of new fuels and massive investments in ship conversion, we expect capacity reductions and an increase in market prices in the short and medium term.
Summary
- Significantly higher fuel prices
- Refineries to develop 0.5% sulfur fuel – an uncertain price, but more expensive than current fuels
- Scrubber systems in most cases require dry docking, which results in lower capacity
- High investments cost