There are indications that the new rules by the International Maritime Organisation (IMO) would cost shipping firms additional $60 billion yearly, as the industry tilts towards cleaner fuel for water transport.
The IMO had unanimously adopted the global sulphur cap requiring all ships to use fuels with maximum 0.5 per centsulphur content from January 1, 2020.
The new rule will ensure that transportation on water had little effect on the habitat, but the higher cost incurred by shipping firms may also trigger freight cost on cargoes.
A new report from Wood Mackenzie projected that a combination of higher crude prices and tight availability of Marine Gas Oil (MGO) could take the price of the product up to almost four times that of fuel and eventually cost the entire industry additional $60 billion yearly.
With the implementation of the IMO regulation in 2020, the shipping industry will have to consider a switch from fuel oil, which is high in sulphur content, to alternative fuels, such as MGO, or install scrubbers, a system that removes sulphur from exhaust gas emitted by bunkers.
Research Director for Asia refining at Wood Mackenzie, Sushant Gupta, said, “Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a high rate of return of between 20 per cent and 50 per cent depending on investment cost, MGO-fuel oil spread and ships’ fuel consumption.
“Despite attractive returns, penetration rate for scrubbers could be limited by access to finance, scrubber manufacturing capacity, dry-dock space and technological uncertainties. The shipping industry is traditionally slow to move, but in this case, early adopters may hugely benefit,” he added.
However, Gupta noted that switching to MGO is a more costly solution. In full compliance, shippers are expected to try to pass the cost to consumers and freight rates, which could increase by up to $1 a barrel.
Wood Mackenzie said that it also expects a shift in bunkering locations based on compliant fuels availability. Singapore could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels.
Gupta added that: “The options for refiners and shippers will depend on the course of action decided by each of them. At the end of the day, the shipping industry and refineries need to communicate and find middle ground, and time, unfortunately, is running out.”
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