New Fuel Emission Standards to Increase Freight Rates

Seabury Maritime LLC, the global maritime and transportation investment & merchant banking and industry advisory firm, a division of Seabury Capital Group LLC, has released a white paper, produced in cooperation with Gemini Shippers Group, providing insight and a general overview of the issues related to the implementation of the IMO 2020 regulation on sulfur oxide emission.

With less than 10 months before the IMO 2020 regulation on sulfur oxide emission goes into effect January 1, carriers and shippers alike are facing an uncomfortable uncertainty over its potential effects on costs and freight rates as they enter the 2019-2020 trans-Pacific contracting period. The IMO 2020 regulation mandates the reduction of sulfur oxide emission from 3.5 percent m/m to 0.5 percent m/m.

“The 2020 deadline to reduce sulfur oxide emissions is one of the most significant regulations impacting liner shipping in recent memory,” commented Seabury Maritime Vice President Nikos Petrakakos. “With fuel costs already representing more than 50 percent of total operating expenses, the IMO 2020 poses an increase too significant for carriers to absorb and stay operational.”

Based on Seabury Maritime’s analysis, “What today costs approximately $1,600 to ship a container from China to the USEC, will now cost $600 more after the IMO 2020 regulation goes into place. Shippers should be prepared to share in the risk of changing fuel prices through the assessment of reasonable and transparent fuel-surcharge calculations.”

The white paper details that the lack of industry standard for fuel-surcharges computation or a clear picture of the underlying costs for low-sulfur fuel allows participants to only roughly estimate its economic impact. Several factors affecting a carrier’s calculation of the fuel surcharges add complexity, making transparency ever so paramount to building trust on both sides.

Kenneth O’Brien, Chief Operating Officer of Gemini Shippers Group, commented: “Through our collaboration with our partners at Seabury Maritime, we have identified the inherent risks and cost drivers represented by the IMO 2020 regulation. Our desire to add transparency to the issues will help shippers and carriers alike navigate the 2019-2020 contracting season.”

Petrakakos further elaborates that “the intention of this white paper is to promote open dialogue between carriers and shippers by providing insight and a general understanding around metrics used behind bunker calculations.” The white paper’s key takeaways include: 

• January 1, 2020 will mark the full implementation of IMO 2020 regulations reducing sulfur;
• oxide emission from 3.5 percent m/m to 0.5 percent m/m. Carriers have several ways to comply with these new rules. Each method brings its own advantages, disadvantages, and cost implications;
• New emission standards will lead to significant improvements in pollution derived from ships’ emissions;
• Compliance will lead to an increase in operational costs, which carriers will attempt to pass on to shippers through new bunker formulas;
• 2019-2020 trans-Pacific contract negotiations will occur amid the uncertainty of this pending cost increase;
• Shippers should accept and endorse that the benefits of environmental improvements come with some increases in costs for low sulfur fuel, while engaging in a thorough dialogue and review of fuel surcharge trade factors with their carrier partners; and
• Fuel costs already represent more than 50 percent of total operating expenses, and IMO 2020 poses an increase too significant for carriers to absorb and stay operational.

“Transparency is key to creating trust that the carriers are truly just passing these new costs in an equitable way. Most fuel data may seem like an important trade secret, but more transparency can actually lead to deeper relationships and less pushback from rightfully suspicious customers, while better highlighting carriers’ efforts to improved fuel efficiency and lower costs as a result. Lack of clarity can even cause undue blowback to carriers in some cases, simply because of the lack of understanding of the metrics, a self-inflicted wound for carriers,” concludes Petrakakos.

Seabury Maritime can help both shippers and carriers in creating mutual trust by analyzing the data from an independent advisor’s vantage point. All parties benefit when there is a clear understanding of the underlying costs for carriers to provide their services to shippers. A transparent method to calculate fuel surcharges and the impact of low-sulfur fuel is imperative to securing the financial health of carriers and shippers supply chains.

The white paper was presented during The Journal of Commerce’s Trans-Pacific Maritime Conference held March 3-6 in Long Beach, CA. Access the complete document at http://www.seaburymaritime.com.