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New green fuel regulation increases sea transport costs

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New green fuel regulation increases sea transport costs

October 15, 2014 - 07:05
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North European and the US exporters and importers will face an increase in sea transport costs from January 2015 when a new regulation on marine pollution is implemented, according to maritime consulting firm Drewry.

For ships sailing in so-called Sulfur Emission Control Areas (SECA), tough new rules on sulfur emissions will be enforced from 1 January 2015, cutting the sulfur limit to 0.1%, from 1% today. This will force shipping companies to use more expensive low-sulfur marine gas oil, install liquefied natural gas engines, or fit costly mitigating systems to reduce pollution.

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Map of Northern Europe's and North America's Sulfur Emission Control Areas

 

In Drewry's view, very few container ships will be equipped with liquefied natural gas engines in the next few years and switching marine fuel to low-sulfur marine gas oil will be the most common response. Low-sulfur fuel costs about 45% more per tonne than the marine fuel used today, so the effect of switching will be material.

The extra cost of this switch of marine fuel will vary not only by geography (Asia, western France and the Mediterranean, for example, are currently outside the SECA, see map), but also by route and by ship size. It will also depend on the prevailing price of low-sulfur fuel. Drewry and other companies expect that the price will increase in response to much higher industry demand from next year.

The extra costs will initially be borne by shipping companies. But they will surely be passed on to exporters and importers either via increased ocean freight rates or via higher "bunker adjustment factor" or similar cost surcharges. The exporters and importers facing the largest percentage increases in their sea transport costs are those who ship products within Northern Europe and between the US and northern Europe (or vice versa): This is because a higher percentage of the ship voyage time will be spent in the emission control areas for these routes.

201410_seca_02.jpg

 

Drewry estimates that the extra fuel cost when using a containership service between Northern Europe and the US East Coast will be about US$29 per 20-ft equivalent unit (TEU - the standard measurement unit in container shipping) and per round-voyage. Between Northern Europe and the US Gulf Coast via the US East Coast, the extra cost will be higher, at about US$49 per TEU per round voyage, because the ship will burn more fuel within the emission control area in the US. Similarly, paper importers in Russia will be at the end of the Baltic emission control area and have to pay more for green fuel than, say, French paper importers, located on the edge of the area. These extra costs could cut or kill the profit margin on low-value products to certain destinations.

It will become more important for exporters and importers to benchmark their sea transport costs and their fuel surcharges. Some pulp and paper exporters are doing just that within the sea transport cost "benchmarking club" set up by Drewry earlier this year.

Budgeting an increase in sea transport costs for 2015 delivered product contracts would also be wise.

Scandinavian paper producers who export to western Europe are worried that their sea transport costs will increase disproportionately because both Scandinavia and northwest Europe are within the Sulfur Emission Control Areas.

But will companies in regions outside the emission control areas be immune to these environmental cost increases? The answer is probably not: the International Maritime Organization, the United Nations agency in charge in maritime regulations, plans to impose tough 0.5% limits on the sulfur content marine fuel in 2020 globally, subject to a feasibility review (see table).

In the meantime, Scandinavian and US companies will pay the highest environmental sea transport costs.

Philip Damas is director in charge of the Supply Chains consulting practice of Drewry. For further information, contact supplychains@drewry.co.uk.

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