On October 1, 2019 low-sulfur fuel surcharges will begin appearing on trans-Pacific ocean shipping rates as carriers pass along the increased costs associated with the fuel. Starting January 1, 2020 the International Marine Organization (IMO) will require ships to burn only .5% sulfur emissions, a significant drop from the 3.5% currently allowed. Some experts talking to Reuters predict this could cause a 25% jump in shipping fuel costs.
However, carriers have options; ships can be retrofitted with scrubbers that reduce the sulfur emissions to acceptable levels without depending only on low-sulfur fuel. These scrubbers are expensive and necessitate ships be docked and retrofitted. The demand for scrubbers is also a caveat; they’re expensive and can take three weeks or longer to install. Only around 2% of vessels are expected to take advantage of retrofitted scrubbers.
For carriers planning to forgo the scrubbers and just transition to the low-sulfur fuel, cost estimates are wildly varying as many remain hesitant to begin the transition because once transitioned the fuel costs increase instantly. Many would rather use the less expensive fuel as long as possible to delay the additional costs for as long as they can. Some advise that if no carriers turned to scrubbers and all carriers became 100% compliant, costs could skyrocket 60% on the total shipping fuel cost, currently at $100 billion.
The volatility of trans-Pacific rates further complicate the transitions as annual contracts lock in pricing yearly and many shippers are relying on spot rates and fluctuations to create a profit margin that may not exist in their annual contract. Though carriers do have some contractual options for recouping the increased fuel costs, margins are so thin there are few carriers willing to absorb the added costs and will likely pass it all down to the consumers.
Other complications come from the ports that could lose market share when they have to compete with ports offering low-sulfur fuel. According to Reuters, Singapore may lose to China, which has an ample supply of compliant fuels to feed the new demand.
We at Coppersmith understand our clients are watching this closely to begin analyzing these costs for the coming year. We’re going to keep monitoring this news as it unfolds to provide as much information as possible to our clients. If you have questions or concerns or just want to work on a better logistics plan feel free to reach out to your Coppersmith representative to see what we can do for you!