Low sulphur fuel oil – how will it impact international shipping in Australia?


Commencing January 2020, low sulphur fuel oil (LSFO) will be used globally for international maritime transportation. This will reduce damage to the environment. This is the greatest change to marine transport regulation to date and will profoundly affect every part of the shipping industry.


How will low sulphur fuel oil (LSFO) impact international shipping in Australia?

How will low sulphur fuel oil (LSFO) impact international shipping in Australia?


What is low sulphur fuel oil?

The new limit on sulphur content for fuel oil for shipping purposes is below 0.5%. This is a significant reduction from the 3.50% limit that has been in effect since 1 January 2012. Fuel oil for shipping purposes is that used in all shipboard engines and boilers, across the board.

Exhaust Gas Cleaning Systems (EGCS) provide an alternative method of reducing sulphur content. These systems scrub from exhaust gases harmful sulphur oxides and other material. This is to ensure marine engine exhaust gases are not harmful to the environment.

Low sulphur fuel oil will add cost to Australian international shipping

Increases in LSFO cost and investing in EGCS means oil costs for marine transporters will be greater. This is unavoidable because the Emission Control Areas (ECA) mandated 0.5% sulphur limit is obligatory for all shipping companies, without exception.

The International Maritime Organization (IMO) marine fuel oil sulphur limits come into force in 2020. Prices are expected to rise by around 25%. An increase of an extra $24 billion in costs is also anticipated.

So how ready for the imminent deadline are those industry sectors reliant on marine fuel oil? It would seem they are not. This is a concern for the maritime industry and all dependent on it for transporting goods by sea.

What effect will this have over the long term? What difference will the IMO 2020 regulations make on capacity and freight rates?


Low sulphur fuel oil will add cost to Australian international shipping

Low sulphur fuel oil will add cost to Australian international shipping


Huge effort required for implementation

Maritime transportation used around 3.8 million barrels of oil in 2017. This was primarily high sulhur fuel oil HSFO which, as marine engine fuel, releases 1 to 3.5% sulphur. This was equivalent to around 50% of global consumption overall. The industry faces an enormous but essential task to realize the required 0.5% sulphur target.

The majority of maritime transport companies are worried. Will they be able to recover the monies they must outlay to reach the IMO 2020 SOx limit? Many are unsure of the new regulatory system, asking how it will work. A common query is whether there are other ways to achieve compliance.

No realistic alternative fuels

The easiest solution is for maritime transporters to switch to LFSO or low sulphur diesel (LSD) fuels. Expecting this, major players like ExxonMobil are ramping up production ahead of time.
Some marine transporters might prefer to use EGCS to avoid sulphur emissions. Maersk has chosen this option, planning to have scrubbers in place before January 2020.

Using liquid natural gas (LNG) or methanol is a further option. There is, however, not enough of these to provide for the expected requirements. With LNG, it is believed that by 2040 there would be only around 10% of what will be needed.

Clean fuel producers will benefit

Most marine transporters will be forced to deal with higher prices for fuel oil. LSFO processors are likely to profit from the changes. The cutting-edge methodologies of the US and China see low SOx fuel being made by oil refineries.

Gulf Coast (US) refineries are poised for large financial gains from the expected demand for LSFO. In Europe, leading players such as BP, Pic and Repsol SA are ramping up production facilities. By the 2020 deadline they need everything in place to ensure they have sufficient supplies to meet anticipated market demand.

Low sulphur fuel oil will not affect Australian shipping capacity

Not much change in shipping volume is anticipated with the inception of the new limits. Some marine shippers may notice reduced shipping volume for a while, as they adjust to the new order.
LSFO seems likely to be in short supply initially and it is costly to change to LNG. It is therefore likely many marine shippers will install scrubbers so they are compliant with IMO 2020.

IMO 2020 may also affect shipbuilding. New environment-friendly ships, 30% more energy-efficient and providing for expected volume requirements, could be required.

Low sulphur fuel oil will increase Australian shipping freight rates

Volume requirements are not likely to alter much due to the new low SOx limit, but prices will rise. Around $24 billion will be added to the marine transport industry’s compliance with the changed regulations on low sulphur. This, under the new limits, means an Asia-North Europe return trip could cost $1 million more.

The expected shipping costs increase follows the recent push for increased bunkerage charges. This initiative was by major players like, MSC, Maersk and CGM. Bunkerage costs increased in mid-2018. This is an indication of how marine shippers slow to respond and poor in preparation of rising oil prices.

The marine industry is being majorly affected by the LSFO level changes. Various options need to be considered. These include budgetary considerations (e.g. cost of new equipment, etc), plus the lack of LSFO and the unpreparedness of the marine industry overall. Also, it is too early to tell how shipping freight costings will be affected. They will certain go up, but by what percentage is impossible to know.


Low sulphur fuel oil will increase Australian shipping freight rate

Low sulphur fuel oil will increase Australian shipping freight rate


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