Sulfur Cap Could Add Billions in Bunker Costs

Container shipping firms' annual costs have risen by a total $500 million due to new sulfur emissions regulations that have forced vessels to use higher cost fuel, the OECD said in a report on Thursday.

Rising fuel costs will further hurt an industry already stung by overcapacity, low demand and falling rates.

From January 2015, ships entering Emissions Control Areas from the Baltics to the North American coast had to switch to ship fuels with less than 0.1 percent sulfur content, from 1 percent, as part of a campaign to combat marine pollution.

An even lower cap of 0.50 percent is planned for 2020 and it could add annual total costs of around $5 billion to $30 billion for the container shipping industry, the Organisation for Economic Co-operation and Development (OECD) report said.

For an industry operating on very slight margins it represents significant cost increases, partly mitigated by falling fuel prices, the report said.

"We will assume that container shipping lines have limited possibility to absorb cost increases, so they will likely transfer these to their customers," it said.

According to OECD calculations a global sulfur cap of 0.5 percent in 2020 mean costs for transporting agricultural goods could rise by as much as 7.5 percent, manufactured goods by 3.5 percent and industrial raw materials by 16.4 percent.

Maersk Line, the global container shipping market leader, has said weak enforcement combined with the significant cost burden could prompt some shipping companies to flout the rules.

Maersk Line, a unit of Danish shipping and oil group A.P. Moller-Maersk, spent $6.1 billion on ship fuel last year of which 7 percent spent on buying the more expensive fuel.

"Considering the significant costs to the shipping industry, effective enforcement is of utmost importance to guarantee a level playing field," OECD said.

The report said fines imposed rarely surpass the cost advantage of ignoring sulfur emissions restrictions.

In a report this month, Drewry Maritime Equity Research wrote that "container shipping is staring at a terrible 2016 with a structural slowdown in global trade volumes, historical low freight rates and ever increasing capacity could result in industry losses of $6 billion."