Many cargo owners still uncertain about the impact of IMO 2020 on their freight costs, although better information is now becoming available, says Drewry, which predicts BAFs will soar from Q4 2019 and be very volatile in the first half of 2020, before falling in 2021.
Many cargo owners remain unclear about the impact on their freight costs of the incoming ‘IMO 2020’ low-suphur shipping fuel rules, although better information is now becoming available, says container shipping analyst and data expert Drewry – which is launching a ‘low-sulphur bunker price tracker’.
Drewry said that for several years, “one of the biggest and hardest questions to answer in international shipping has been: what will the new low-sulphur fuel cost from 2020?”. But it said shippers, forwarders and carriers are getting a better idea of costs and data sources.
“Everybody – or nearly everybody – agreed that there will be a large, extra cost for the industry and its users,” Drewry noted. “But shippers surveyed by Drewry on the IMO 2020 issue admitted that ‘data is patchy and confusing’ and a high proportion of shippers replied that they were very uncertain about the impact of IMO 2020 on their freight costs.
Largely as result of this, Drewry developed an IMO Cost Impact Calculator, but said “this required us making our own forecast of the 2020 cost of low-sulphur fuel, because there is no established price in the market for the new fuel. This is changing.
“In July and August, early indications of prices for low-sulphur fuel oil 0.5% (0.5S) compliant with the IMO 2020 rule showed that the new fuel costs about 30% more than the current, high-sulphur IFO380 fuel at Asian ports which have started selling it. This price is based on actual bunkering transactions for ships which trade with Chinese ports, where the 0.5S requirement is already implemented. The low-sulphur 0.5S price in the major port of Singapore is about $560 per tonne.”
However, Drewry said it was asking customers “to be careful when using these early price indications, because the demand for low-sulphur fuel will increase considerably by November/December and market conditions will be very different then”.
To assist shippers, forwarders and carriers who need to revise their bunker charges before and after the switch to low-sulphur fuel, Drewry started a publicly-available Low-sulphur Bunker Price Tracker, which will be updated every quarter and also in December, when many contracts will require data on the new fuel cost.
“Contractually, the ability of shippers and providers to adjust their Bunker Adjustment Factors at an appropriate time towards the end of 2019 – various switching dates can be negotiated – and at a fair cost is a top priority for the next few months,” Drewry noted.
“Shippers who have redefined their BAFs and their bunker indexing mechanism to take into account the IMO 2020 change have nearly always agreed that carriers need to be compensated for the price differential between low-sulphur and high-sulphur fuel – even though some 5% of total capacity is equipped with scrubbers. We believe that the chances are that low-sulphur bunker prices will, after increasing in 2020, fall in 2021 and 2022, as the initial price premium decreases.”
But Drewry said there will be several major indirect repercussions from the switch to low-sulphur fuel regulations:
Shippers will pay a lot more attention and scrutiny to the Bunker Adjustment Factors than in the past.
Smaller ships – which tend not to be equipped with scrubbers or with efficient engines - will be shunned by carriers even more than in the past.
Some aggregate ship capacity will be cut (scrapped) and shipowners will incur capital losses on some of their now-obsolete vessels, built at a time when pollution regulations were lenient.
Paradoxically, shipping lines with a high use of scrubbers (avoiding the extra cost of low-sulphur fuel) will be able to continue to buy a lot of high-sulphur fuel and will become more cost competitive and better insulated from low-sulphur price volatility than other shipping lines.
“The one remaining area of uncertainty is whether carriers will resort to more slow-steaming in the era of more expensive bunkers; watch this space,” Drewry noted, concluding: “Bunker adjustment factors will soar between 4Q19 (fourth quarter 2019) and 1Q20, first, and will be very volatile in the first half of 2020.”
Source: Lloyds Loading List
The opinions expressed herein are the author's and not necessarily those of The Xinde Marine News.
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