From The Wall Street Journal
The introduction of low-sulfur fuels in oceangoing vessels next year will mark the biggest change in ship propulsion since the maritime industry moved from coal to heavy oil early in the 20th century.
The compulsory switch on Jan. 1, 2020, will affect at least 60,000 vessels and is estimated by shipping executives to cost up to $50 billion industrywide. It is a financial burden that has triggered a noisy debate and warnings over the quality and availability of the new fuels and crushing new costs along with calls to delay the new 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. General agreement also is spreading 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, the heavy-burning fuel with 3.5% sulfur content that propels most of the world’s oceangoing vessels. The fuel 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. That is more than 2,000 times the level allowed for cars on U.S. highways.
The new 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 for the new formulation than they pay for bunker because of the higher cost to oil companies 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 surcharges tacked on to shipping charges. It will then be up to shipping customers such as the retailers that are big users of container ships to pass along those higher costs.
“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 been a common tool for passing along increases in operating costs since sharp swings and spikes 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 there is not enough visibility into what they are paying for as 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 and flashes the sulfur particles into the sea. The devices cost $3 million to $10 million per ship and enable the vessels to continue burning cheaper heavy oil while aiming to recover their costs in about two years.
Carriers installing the scrubbers are effectively betting they will have a cost advantage over operators using the new, more expensive low-sulfur fuel. The devices 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.
