Low-sulfur Costs Charging In

In late May, Drewry’s Container Insight Weekly highlighted the new low-sulfur fuel environment regulations that will come into force in January 2015 and some five months later a number of carriers have finally announced the related surcharges they will be requesting from shippers.

In summary, from 1 January carriers will be obligated to use fuel with maximum 0.1% sulfur content, down from today’s allowed 1%, in so-called Emission Control Areas (ECAs) in North Europe and North America, see map below.

Figure 1
Northern Europe’s and North America’s Emission Control Areas

Carriers have said that they will collect new “low-sulfur surcharges” or “emission control area charges” in addition to ocean freight. As predicted by Drewry, these new fuel charges vary by geography and by trade (see Figure 2). They range from $30 per 40ft container (for Asia to/from North West Europe) to $280 per 40ft container (for Baltic region to/from Canada East Coast).

For the high-volume, big-ship routes between Asia and both North West Europe and the US, the surcharges are low and represent only a marginal increase on current freight costs.

However, for the transatlantic tradelane, the low-sulfur surcharges of at least $120 per 40ft represent an extra cost of some 6% to 12% on top of existing, typical all-in spot rates of about $1,000 eastbound and $2,000 westbound (including Terminal Handling Charges). The rates are based on Drewry’s Container Freight Rate Insight global freight rate database.

Figure 2
Average Low-Sulfur Fuel Surcharges, Applicable from 1 January 2015 (US$/40ft container)

Worryingly, for Baltic region exporters and for any company shipping containerized products to and from the Baltic region (Finland, the Baltic states and Russia), the low-sulfur surcharges for the Baltic region is about $100 per 40ft container higher than for North West Europe. This differential is justified because fuel-inefficient feeder ships are required to serve Baltic ports and they must use low-sulfur fuel in the area. The tradelane between the Baltic region and the US East Coast has the most expensive low-sulfur surcharge of the routes reviewed here: $280 per 40ft. This cost will cut the profit margin of Baltic exporters and could make some of them uncompetitive in the US market.

Table 1
Low-sulfur Fuel Surcharges, Applicable from 1 January 2015, by Carrier (US$/40ft container)

The new low-sulfur surcharges also vary by carrier (see Table 1). On the Asia-Europe trade, the surcharges of the three largest carriers are very close. On the transatlantic route, surcharges vary widely between carriers, with MSC being more costly.

The Transpacific Stabilization Agreement (TSA), a discussion group of 15 container lines serving the eastbound Asia to US trade, said that shippers can expect initial low-sulfur charges on 1 January of $67 for Asia-USEC and $53 per feu for Asia-USWC, versus $17 and $16 at present for the respective trades. Charges per teu will be assessed at 90% of feu levels.

How carriers recover these significant extra costs will be an interesting problem, particularly as many high-volume shippers have specific “no surcharge” clauses within their contracts. Prior to the signing of the annual Transpacific 2015-16 contracts in May, carriers will have to negotiate with their customers to either adopt a modified low-sulfur component within the total bunker charge or apply a standalone charge. Much will depend on the existing contract terms.

Whether shippers accept the separate surcharge within the next annual contracts is not a given and Drewry Supply Chain Advisors, the sea freight procurement consultancy arm of Drewry, advises large shippers to try to include the new low-sulfur surcharges in all-inclusive rates fixed for 12 months. By using more fuel-efficient mega-vessels, carriers may be able to mitigate some of these cost increases, but not 100%.

However, no one knows whether, come January, low-sulfur Marine Gas Oil (MGO) – approximately $280 per tonne more expensive that IFO 380 at current Rotterdam prices – will remain at current prices or will increase faster than other fuel types in response to much higher industry demand.

Figure 3
Recent IFO 380 and MGO Prices at Port of Rotterdam (US$/tonne)

The cost differential between MGO and IFO will have a significant impact on the likely costs levied to importers and exporters. The TSA told Drewry that under the new regulations a $20 increase in the differential between MGO and IFO fuels would add $4 per feu in costs to carriers for Asia to US West Coast services and $7 per teu for Asia to US East Coast loops.

To cover any potential swing in the fuel price differential, the TSA will introduce a floating low-sulfur cost recovery formula that will be adjusted quarterly based on a 13-week average of weekly prices. The TSA’s formula will also take into account revised fleet characteristics such as vessel size, speed and effective capacity; MGO consumption rates; and sailing time within the ECA zone.

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Carriers will need to provide transparent cost calculations to exporters and importers to justify the cost surcharges which they have announced from January. Carriers do face additional costs to meet the tighter pollution rules, but may have a difficult task convincing big shippers to pay a separate low-sulfur surcharge.

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Source: Drewry Maritime Research, Container Insight Weekly