The Wall Street Journal, 4 April 2019
A shift from heavy oil to lower-sulfur fuels next year will hit vessel operators and cargo owners, but preparations are finally taking shape
The introduction of low-sulfur fuels in oceangoing vessels next year to meet new emissions standards will mark the biggest change in ship propulsion since the maritime industry moved from coal to heavy oil early in the 20th century.
The emissions mandate taking effect at the start of 2020 will affect at least 60,000 vessels and cost the industry up to $50 billion, according to shipping executives’ estimates. The expected burden has triggered a noisy debate about the added costs, as well as warnings over the quality and availability of the new fuels—and calls to delay the rule.
With eight months to go, however, preparations are in full swing and the doomsday predictions are dissipating as more fuel providers set up depots and distribution sites. A consensus also is building in the shipping world that customers will have to bear the higher costs across supply chains, as long as carriers are clear and transparent about how much more they have to pay to keep ships moving.
Cargo owners expect a significant jump in freight rates, which over the past five years have been hovering below break-even levels for vessel operators as a result of a glut of ships in the water and vicious price wars.
Many of the world’s shipping companies have been unprofitable for much of the past decade, and the outlook through 2021 remains grim on the back of a slowing global economy and trade tensions among the U.S., China and the European Union.
“If the extra costs related to low-sulfur fuel go to shipping companies and end there, it would result in bankruptcies,” said Soren Skou, chief executive of A.P. Moller-Maersk A/S, the world’s biggest container ship operator by capacity.
The new formulation of low-sulfur fuel is supposed to replace bunker, which propels most of the world’s oceangoing vessels. The heavy-burning fuel has 3.5% sulfur content—far above what is allowed for automobile gasoline in the U.S.—and is the main reason the shipping industry contributes about 13% of world-wide sulfur-dioxide emissions, according to the International Maritime Organization, the global regulator managing the switch.
The new maritime fuel will have a 0.5% sulfur content. A 2016 study in Finland said that without the change in fuel, pollution from ships would contribute to more than 570,000 additional premature deaths globally between 2020 and 2025.
The actual cost of the low-sulfur fuel remains only a guess. Shipping executives expect to pay 25% to 40% more than they pay for bunker because of the higher cost for producing the fuel and setting up new distribution sites. Prices for the most common type of bunker have been running around $440 per metric ton so far this year.
Many cargo owners accept they will shoulder much of the bill, likely through shipping surcharges. Retailers are big users of container ships, and it will up to them and other shipping customers whether the costs then get passed long to consumers
“It is unclear at this point what kind of impact the fuel cost increases will have on consumer goods,” said Jon Gold, vice president of supply chain and customs policy at the National Retail Federation. “I think this will really depend upon the retailer and what their strategy is to mitigate any potential cost increases.”
Fuel surcharges have become a common tool for passing along increases in operating costs following sharp swings in bunker costs early in the decade.
“The supply chains operated just fine in 2011-2014, and there is no reason why this should not be the case this time around either,” said Lars Jensen, chief executive of Copenhagen-based SeaIntelligence Consulting.
Some shippers complain of a lack of clarity on costs, saying they are often saddled with surcharges that are difficult to understand.
“There is uncertainty on what will happen and how freight rates will be affected,” said Jordi Espin, a maritime policy manager at the European Shippers’ Council, a trade body that represents 75,000 cargo owners in the EU.
“Rates are already pushed up by ‘climate costs’ or fuel bunker surcharges, with no clear picture on why these extra costs already apply,” Mr. Espin said. “The whole process lacks transparency and a customer-oriented approach.”
Much of the debate on the operating side has focused on scrubbers, a sulfur-trapping exhaust system that treats ship fumes before they are released in the atmosphere. Some carriers are relying on their use to reduce emissions and meet the new industry standard even while sticking with bunker fuel.
The devices cost $3 million to $10 million per ship, but those carriers using them are betting they can recover the cost in about two years by burning bunker instead of the new, more expensive low-sulfur fuel.
Scrubbers are controversial, however, with critics saying they essentially mask sulfur emissions without eliminating the environmental damage.
“There is a lot of talk about scrubbers, but at the end around 90% of the global fleet will use low-sulfur fuel,” said Rolf Habben Jansen, chief executive of German boxship major Hapag-Lloyd AG , which plans to install scrubbers on only 10 of its 227 ships.
Meanwhile, concerns that there will be too little low-sulfur fuel to power the global fleet are easing. Oil company BP PLC said last month there will be ample supply at major ports, echoing similar assurances by suppliers Royal Dutch Shell PLC and Exxon Mobil Corp.
The sulfur-reduction plan is the step in shipping’s quest to become friendlier to the environment. The industry has agreed to cut by half all greenhouse emissions by 2050, a far costlier exercise that will involve new hull designs and hybrid propulsion systems.