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Seabury: New fuel emission standards to increase freight rates

05 Mar 2019

Maritime and transportation investment & merchant banking and industry advisory firm Seabury Maritime LLC, a division of Seabury Capital Group LLC, on Monday (4 March) released whitepaper: IMO 2020 What Every Shipper Needs To Know.

The document was produced in cooperation with the Gemini Shippers Group and provides insight and a general overview of the issues related to the implementation of the International Maritime Organization 2020 (IMO 2020) regulation.

“The 2020 deadline to reduce sulphur oxide emissions is one of the most significant regulations impacting liner shipping in recent memory,” commented Seabury Maritime Vice President Nikos Petrakakos.

“With fuel costs already representing more than 50% of total operating expenses, the IMO 2020 poses an increase too significant for carriers to absorb and stay operational.” 

Based on Seabury Maritime’s analysis, “What today costs approximately USD 1,600 to ship a container from China to the USEC, will now cost USD 600 more after the IMO 2020 regulation goes into place. Shippers should be prepared to share in the risk of changing fuel prices through the assessment of reasonable and transparent fuel-surcharge calculations.” 

The whitepaper details that the lack of industry standard for fuel-surcharges computation or a clear picture of the underlying costs for low-sulphur fuel allows participants to only roughly estimate its economic impact. Several factors affecting a carrier’s calculation of the fuel surcharges add complexity, making transparency ever so paramount to building trust on both sides. 

Kenneth O’Brien, Chief Operating Officer of Gemini Shippers Group, commented: “Through our collaboration with our partners at Seabury Maritime, we have identified the inherent risks and cost drivers represented by the IMO 2020 regulation. Our desire to add transparency to the issues will help shippers and carriers alike navigate the 2019-2020 contracting season.” 

Petrakakos further elaborates that “the intention of this whitepaper is to promote open dialogue between carriers and shippers by providing insight and a general understanding around metrics used behind bunker calculations.” The whitepaper’s key takeaways include:

  • January 1, 2020 will mark the full implementation of IMO 2020 regulations reducing sulphur oxide emission from 3.5 percent m/m to 0.5 percent m/m;
  • Carriers have several ways to comply with these new rules. Each method brings its own advantages, disadvantages, and cost implications;
  • New emission standards will lead to significant improvements in pollution derived from ships’ emissions; Compliance will lead to an increase in operational costs, which carriers will attempt to pass on to shippers through new bunker formulas;
  • 2019-2020 trans-Pacific contract negotiations will occur amid the uncertainty of this pending cost increase;
  • Shippers should accept and endorse that the benefits of environmental improvements come with some increases in costs for low sulphur fuel, while engaging in a thorough dialogue and review of fuel surcharge trade factors with their carrier partners; and
  • Fuel costs already represent more than 50 percent of total operating expenses, and IMO 2020 poses an increase too significant for carriers to absorb and stay operational.

“Transparency is key to creating trust that the carriers are truly just passing these new costs in an equitable way. Most fuel data may seem like an important trade secret, but more transparency can actually lead to deeper relationships and less pushback from rightfully suspicious customers, while better highlighting carriers’ efforts to improved fuel efficiency and lower costs as a result. Lack of clarity can even cause undue blowback to carriers in some cases, simply because of the lack of understanding of the metrics, a self-inflicted wound for carriers,” concludes Petrakakos. 

The full whitepaper ‘IMO 2020 What Every Shipper Needs To Know’ can be found here.

Published: 5 March, 2019

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