Fuel surcharges have been a topic of conversation and negotiation for carriers and shippers alike for many years. Fuel is a huge percentage of a carrier’s overall cost for operating their business, and carriers have historically utilized various fuel surcharges, from “emergency” to “interim,” in order to pass along volatility of these costs to their shipper customers.
Shippers have historically cited fuel costs as a major area of concern and confusion, and these costs often lead to a certain amount of discord with ocean carriers – who also want to operate profitably. Additionally, the ocean carrier community has continued to consolidate, and fewer competitive options exist for shippers to choose from. This tumultuous oceanic landscape is going to continue to evolve over the next year and beyond, making it critical for shippers to be aware of the upcoming changes and be prepared for increased ocean freight costs to come.
A New 2020 Regulation
On January 1, 2020, a new global regulation will be put into effect in the effort to reduce air pollution from container ships. Currently, most vessels can use bunker fuel (the maritime fuel that runs large container ships) with up to 3.5% sulfur content outside current emission control areas, or ECAs — but the new global sulfur cap will become 0.5% in 2020, per the International Maritime Organization (IMO). The IMO, a voluntary organization that acts in a governing capacity to set ship and container operational standards, recently announced that this new regulation will “significantly reduce the amount of sulphur oxides emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”
According to the IMO, “The main type of ‘bunker’ oil for ships is heavy fuel oil, derived as a residue from crude oil distillation. Crude oil contains sulphur which, following combustion in the engine, ends up in ship emissions. Sulphur oxides (SOx) are known to be harmful to human health, causing respiratory symptoms and lung disease. In the atmosphere, SOx can lead to acid rain, which can harm crops, forests and aquatic species, and contributes to the acidification of the oceans. Limiting SOx emissions from ships will improve air quality and protects the environment.”
Additionally, there is a limit of 0.10% mass by mass (m/m) already in effect in certain ECAs, including the Baltic Sea, the North Sea, much of North American (including designated coastal areas off the U.S. and Canada); and the U.S. Caribbean Sea region.
What Does This Mean for Shippers?
In 2020, costs are going to increase for international shippers, and some ports (including areas of China) are even rolling these regulations out sooner than the first of the year. International shippers must know which ports are instituting these regulations and when, and plan accordingly for the associated increased costs.
From an environmental standpoint, vessels that sail in and out of ports in any ECAs must agree to use the lower-percentage bunker maritime fuel – and this has a huge cost impact for carriers, as fuel with lower sulfur content is more expensive. Carriers do have the alternative option to buy a scrubber, or gas cleaning system, to utilize when they must travel in and out of ECAs, which removes sulfur from the ship’s engine and boiler exhaust gases, thereby meeting the reduced emission standards.1However, whether carriers are buying .5% sulfur content fuel, or purchasing scrubbers for each of their ships, this directly translates into an increased cost, which will certainly be transferred to shippers.
Currently, in order to provide more transparency to their customers, carriers are developing new, all-inclusive fuel factors instead of having various differing fuel surcharges. However, there’s not a unified approach to fuel at this point in time, and any upcoming “standard” fuel surcharge could still differ from carrier to carrier.
The primary season (April to May) for shippers to be negotiating their Trans-Pacific Eastbound contracts is fast approaching, and these rates may be impacted sooner rather than later. Shippers must be having conversations with their carriers in regards to what fuel pricing is going to look like – it’s important to be prepared, be knowledgeable and be ready to negotiate.
International Maritime Organization, http://www.imo.org/en/MediaCentre/HotTopics/Pages/Sulphur-2020.aspx
Mollie Bailey, Director of International, Transplace, has more than 20 years of international transportation experience. She is responsible for operations and regulatory compliance for Transplace’s ocean and air forwarding business. Prior to joining Transplace, Ms. Bailey worked for C.H. Robinson International for 14 years in all facets of the global operations division. She served as General Manager of the DFW International office prior to joining Transplace International. Ms. Bailey is a Licensed Customs Broker.