IMO 2020 Sulfur Cap
IMO 2020 will be rolled out to limit sulfur emissions in the shipping industry to 0.5%. There is an environmental concern regarding the current limits of 3.5% sulfur emissions in non-ECA zones. Shipping contributes 9% to global sulfur emissions, and it is harmful particularly in the coastal regions of high shipping activity. Sulfur is a deadly and poisonous pollutant that can cause serious damage to the environment and human life. Increase in sulfur emissions can lead to respiratory illness, crop failures, acid rain and haze. The urgency is also based on findings that tighter guidelines will prevent over 570,000 premature deaths between 2020 and 2025 (Reuters). There is a total of 38,900 commercial ships worldwide. The overall cargo ton miles of the world’s seaborne trade has increased from 30,000 billion in 2000 to about 55,000 billion in 2017 (ICS). This is also reflected in the fact that 90% of the global trade is dependent on ocean freight because of its cost-efficiency and economic benefits. The bunker fuel which is used as fuel for ships currently accounts for 7% of total oil consumption in the transportation sector, which is an equivalent of 3.5 million barrels/day (Visual Capitalist). However, the total number of sulfur dioxide emissions has decreased between 1980 to 2010, from 151.51m tonnes to 97m tonnes (OWD). That is attributable to the various regulations imposed by MARPOL between 1978 and 2005 (IMO). Yet, the total absolute number of deaths due to air pollution has increased from 1.68 million in 1990 to 2.85 million in 2017 (OWD). Perhaps, this anomaly is caused by the long-term effects of air pollution and rapid economic growth in non-ECA regions like China, India and other South Asian nations where such death tolls are higher. The regulations are also important to establish uniformity across the industry and prevent implementation of different rules in different zones by state actors which will result in higher uncertainty for the global industry. Any delays in implementation will cause the IMO to lose its credibility as a rule-making body, and weaken its position for future regulations (Reuters).
Although the regulations will have impacts on the oil refining industry, and knock-on effects on the global economy as a whole, they are subjected solely to the shipping industry. One of its most obvious consequences is the increased costs of shipping which are most likely to be passed on to the customers (and further on to the end users of imported products). Annual bunker fuel costs are expected to rise by 25% (up to $6 billion) in 2020, and the total expected cost to consumers is expected to be at $240 billion (Visual Capitalist). There are multiple ways in which the new regulations are set to disrupt the global trade flows. The demand for HSFO may drastically reduce once the regulations kick in, whereas the demand may increase for middle-distillates such as gas-oil and diesel-oil. In 2019, the total demand for HSFO exceeded 3 bbl/day, whereas the gas-oil demand stood at just about 0.75 bbl/day. But, in 2020 i.e. after the regulations are in place, the demand for HSFO is expected to reduce by two-thirds to just 1 bbl/day. However, that doesn’t imply a proportional increase for gas-oil demand, which is expected to increase to just over 1.75 bbl/day instead. The remaining market share of about 1 bbl/day will be taken up by an alternative in LSFO (Low Sulfur Fuel Oil). Hence, the refiners may have to double-up their refinery-runs to produce more middle distillates and LSFO to meet the future demand. Yet, there is high cost of complex infrastructure required for such operations. While the existing complex refiners may gain higher margins on middle distillates and LSFOs, the simple refiners may be forced to sell their stocks of HSFO at cheaper rates. Even then, the complex refiners will have to closely watch the logistical bottlenecks at the terminals and barges where the lack of compatible facilities for compliant fuels will discourage majority of shippers in non-ECA zones from buying LSFO or middle distillates. Singapore is a major HSFO hub and the world’s largest bunkering port where the effects will be strong in the lead up to and the aftermath of IMO 2020 (Platts).
But, the picture may not be too grim for simple refiners either. Since the regulations are only meant for capping sulfur emissions rather than the sulfur content of the actual fuel itself, the use of scrubbers to trap sulfur content from bunker fuel emissions is another option for the shippers. That way, the ships can still run on HSFO. But, the expected cost of scrubber which is between $2 million to $3 million may attract only a few buyers (BCG). Another solution is to run the ships at low speed to burn less fuel and thereby reduce the costs, but that increases the voyage time and lead to time-related losses (Visual Capitalist). LNG is a viable alternative for bunker fuel which will be adopted by an increasing number of shippers in the future. 70 new LNG carriers were added to the global fleet in 2018 alone. LNG supply to bunkering is expected to rise to 15 mtpa in the next decade. But, the costs of upgrade and higher storage capacity will slow down such an adoption (Reuters). Even though the regulations were announced in 2016, many shippers have been too slow to respond and are now facing a tight deadline to find and implement the best compliance strategies for their business. Many refiners are also anxiously awaiting the actual impact of the regulations on the market for their products. Various supply chains that rely on shipping for long-distance logistics are bracing up to tackle any increase in shipping costs that would hurt their future profitability. The global economic slowdown has been widely recognized and the political tensions such as trade wars, Brexit, conflicts in the middle-east etc. may further cause the global trade to deteriorate. Various analysts and experts are extensively concentrating their efforts on determining how the global trade flows and supply chains may be altered in the coming days, but only time will determine the extent to which the IMO 2020 will impact the global economy.
