New fuel norms to put more pressure on shipping firms

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Slowdown effect may be exacerbated by the IMO norms on use of low-sulphurfuel oil coming into effect today

The global shipping industry will embark on a “greener” journey from Wednesday, as a new norm mandated by the International Maritime Organisation (IMO) on using low-sulphur fuel oil to cut ship emissions takes effect. This, in turn, will raise ocean haulage costs for exporters and importers.

The new rule has been discussed over the years to iron out stakeholder concerns on the availability of compliant fuels, and ways to continue using high-sulphur fuel oil without attracting penalties.

The implementation of the rule comes at a time when the global economy is slowing, dealing a blow to the already floundering fortunes of exporters and importers, including those in India.

To add to the woes, the rate hikes secured by many major Indian ports over the past two months will exert further pressure on India’s EXIM trade, say industry sources.

The new IMO rule will raise freight rates for moving bulk commodities as well as goods shipped in containers, as fleet owners pass on to customers the higher cost of burning low-sulphur fuel oil. To recover the extra costs, fleet owners have started collecting — or are set to do so — an environmental fuel fee (EFF), a lower sulphur surcharge (LSS) or a bunker adjustment factor (BAF) from customers.

International maritime transport carries around 90 per cent of the global trade and is currently responsible for approximately 2 per cent of the world’s CO2 emissions, according to BIMCO, the world’s largest shipping association.

The new requirement means that the global limit for sulphur in fuel oil used on board ships has to be reduced to 0.5 per cent m/m (mass by mass) to cut sulphur emissions by 85 per cent. Till today, the maximum sulphur limit in fuel oil globally is 3.5 per cent. Ship fuel or bunkers account for as much as 40 per cent of the operating cost of a vessel.

Ships retrofitted

Top global fleet owners such as Frontline Ltd, Scorpio Bulkers Inc, Stena Bulk AB, Norden A/S, Star Bulk Carriers Corp, DHT Holdings Inc and CMA CGM have retrofitted some of their bigger ships with exhaust gas cleaning systems or scrubbers instead of using high-cost, low-sulphur fuel to reap the benefit of a steep price differential between high- and low-sulphur fuels, which currently hovers in the range of $300 a tonne.

Back home, Great Eastern Shipping Co Ltd has fitted scrubbers on a few of its large ships that permits it to use high-sulphur fuel.

Not reducing the sulphur emissions limit for ships from 2020 will lead to air pollution contributing to more than 5,70,000 additional premature deaths globally between 2020 and 2025, according to a study submitted to the IMO’s Marine Environment Protection Committee (MEPC).

“So, a reduction in the limit for sulphur in fuel oil used on board ships will have tangible health benefits, particularly for populations living close to ports and major shipping routes,” the IMO said.

Domestic policy

Taking a cue from the IMO, India’s Directorate General of Shipping has issued guidance to stakeholders for the smooth implementation of the new global sulphur cap rule.

Meanwhile, state-run ports such as Chennai Port Trust, Cochin Port Trust, VO Chidambaranar Port Trust, Mumbai Port Trust, New Mangalore Port Trust and Mormugao Port Trust have won rate hikes in vessel and cargo related charges, some by as much as 25 per cent, from the tariff regulator.

The rate increases have been implemented to fund the rising operating costs and not to recover any capital investment for improving the ports’ basic infrastructure.

While state-owned ports are allowed to claim a 16 per cent return on capital employed (ROCE), many say they are making a return in the range of 6 to 8 per cent, to justify the hikes. Port users have opposed the rate increases.

Port tariffs

With depleting ocean freight levels, shipping lines are in no position to accept the increase in port tariffs. An increase in vessel- and cargo-related charges will result in higher shipping costs and thereby increase India’s cost of logistics even further, according to the Container Shipping Lines Association (CSLA).

“Since exporters and importers are working on very thin margins, a steep increase will prompt users to shift to more competitive ports,” said a trade source.

Source: The Hindu Business Line

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