Sulphur Regulations to Increase Shipping Prices

On January 1^st, 2015 the sulphur content in the fuel of ships will have to be reduced by 90%. At least in Emission Control Areas (ECA).

While there are more places that will probably join the ECA down the road, there are four current Emission Control Areas[1]:

1. Baltic Sea area
2. North Sea area
3. North American area
4. United States Caribbean Sea area

For us visual learners, the map to the right highlights the ECA.

The reduction in the sulphur content in fuel comes from regulations to reduce sulphur oxide (SOx) and particulate matter emissions.

The regulations are lowering the sulphur content allowed in fuel on a step schedule. Reductions aren’t only happening in established ECA, but it is much more dramatic in those areas.

The International Maritime Organization laid out the schedule in a nice table:

*depending on the outcome of a review, to be concluded in 2018, as to the availability of the required fuel oil, this date could be deferred to 1 January 2025.

For international shippers, there are two major implications to the big reduction that will hit with the new year.

1. Health/Environmental Benefits (awesome)
2. Increased Shipping Costs (less awesome)

Health/Environmental Benefits

This first effect is for everyone, not just shippers.

Here are the effects of SOx, which includes all sulphur oxides such as sulphur dioxide and sulphur trioxide:

Sulphur dioxide can harm crops and trees, textiles, building materials, animals, and people either as a result of exposure to long-term low concentrations or short-term high concentrations. It turns leaves yellow and decreases the growth rate of crops. Sulphur dioxide corrodes metal, and causes building materials and textiles to deteriorate and weaken.

Sulphur dioxide irritates the throat and lungs and, if there are fine dust particles in the air, can damage a person’s respiratory system. Sulphur oxides combine with other substances in the air to produce a haze that reduces visibility.

Sulphur dioxide is a mojor contributor to acid deposition [acid rain]… [2]

Obviously, reducing SOx emissions is an extremely good thing.

Increased Shipping Costs

Of course, there is a downside.

The cost of sulphur reduced fuel is significantly higher than the fuel currently being used. Buying this fuel will increase costs to carriers and the cost will then trickle down to shippers in the form of higher freight rate prices.

Maersk shared their expected costs and increased fees to shippers.

By 2015, Maersk Line expects to purchase 650,000 tonnes of fuel with 0.1% sulphur content annually for our fleet, equal to 7% of all fuel purchased. Based on the current price difference of USD 300 per ton (approx. 50%), the additional cost to Maersk Line will be around USD 250 Million per year.

On top of that Maersk Line will face increased costs for buying services from third-party feeder operators, who will also have increasing fuel costs.[3]

Maersk said in order to offset these increased costs, they will “incorporate the higher average fuel costs into the existing standard bunker surcharge (SBF).”

The surcharge increase is expected to be between $50 and $150 per 40’ container, Maersk said. Factors they shared for determining the increases will be transit time inside ECA, whether or not shipping touches ECA at both origin and destination, and the volatility of low sulphur fuel prices.

“Reefer containers will incur higher cost due to fuel used to generate power on board vessels,” Maersk added.

You can expect that as Maersk goes so will other carriers. As you plan for 2015, it’s a good idea to factor in this increased cost to your imports and exports.