Global sulphur cap – a game changer in shipping?

Vessel MV Balboa

Combination carrier MV Balboa

IMO (International Maritime Organization) has decided that all ships have to comply with the 0,5% Sulphur cap by 2020. This will have a significant impact on shipping costs and risk management practices. Klaveness estimates show that the industry could see freight costs rise by some 20-50%.

Today, all ships burn Heavy Fuel Oil (HFO) except for when they enter limited regional areas, so called ECA’s (Emission Controlled Areas). A main problem with the HFO is the sulphur content of up to 3,5%. Air borne sulphur is considered a significant health risk and hence significant efforts are made to reduce the air emissions globally. This goes for everything from cars, industrial facilities to now also – ships.

There are three principal ways in which a shipping company can comply with the new sulphur requirements:

1. Change to LNG as fuel. However this cannot be done on existing ships, effectively excluding the 50.000+ vessels that are already sailing.

2. Install a scrubber, cleaning the exhaust gas. This is a rather costly alternative (some 2-4 MUSD of investment) and for now an immature technology.

3. Use low sulphur bunker. Based on the statements and actions seen so far this is likely what the majority of owners will do. Whether this will be a “new” low sulphur fuel oil, Marine Gasoil (MGO) or Marine Diesel Oil (MDO) is still to be seen and depends on how the refineries decide to meet the change in demand. Hence, the future price of bunker is very uncertain but most experts would claim that it will be closer to the price of MGO than HFO. Historically, the price spread between HFO and MGO has been some 250 USD/t, which in reality would imply a doubling of the fuel cost in today’s market.

Freight cost

This could have a significant impact on all buyers of freight and the Aluminum industry is a good example. Most of the raw materials used (Bauxite, Caustic Soda, Alumina, Pet coke, Liquid Pitch etc) are seaborne on medium to long haul trades. As an example, if the sulphur cap were implemented today and the ships started to burn MGO at today’s prices, the freight cost of Alumina (or Bauxite) in Panamax vessels from Australia to China would increase with some 20-25%. For longer haul trades in same lot sizes, for instance from the US Gulf to China, the freight cost would increase with some 30-40%. For commodities like pet coke and liquid pitch, normally traded in smaller lot sizes, the freight cost per metric ton is already significantly and the increase following the sulphur cap could become as much as 50%.

In other words, the global sulphur cap is not only a potential game changer for shipping but certainly as much for the industries heavily depending on seaborne freight. 2020 might seem far away, but in reality the new requirements should impact how decisions are made today. Start looking at how your company manage fuel and hence freight exposure would be a good place to start. Learn more about how buyers and sellers of freight need to act now to manage their fuel price risk associated with the Sulphur cap.

Sourcing cost

Another area that needs to be addressed is the sourcing strategy for the company. Sourcing cost is principally driven by two main components; lot size and sourcing area. Economies of scale are significant in shipping and will increase with increasing fuel cost. Today, for instance, the freight per metric ton of Alumina from Australia to the Middle East Gulf is some 20-25% higher in Supramax lot size (avg 48.000 tons) than in Panamax lot size (avg 60.000 tons). Hence, to secure sourcing in Panamax lot size would have a cost advantage in the range of 30-50% if the sulphur cap were effective today.

Sourcing area drives transport distance and hence shipping cost. As an example, based on todays’ market levels and MGO prices, the freight cost of caustic soda from the US Gulf to the Australian west coast will be some 25-30 USD/t higher than the freight cost from Far East or Middle East. The spread in product prices between these sourcing areas has been below this for large periods, hence the incentives for where to buy and how to buy is changing.

The examples above are from the Aluminum industry but could as well been from Iron Ore, Coal, Grains or any other seaborne dry bulk commodity. The 2020 sulphur cap could be a game changer and should influence sourcing strategy and risk management practices already today.

Share this
Share on FacebookTweet about this on TwitterShare on LinkedIn