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The new IMO 2020 regulation is in force. We answer the most important questions.
Since January 1st 2020, all seagoing vessels have to reduce sulphur oxides by 85%. This has resulted in a high level of uncertainty about availability of petroleum products and prices.
Below we answer your most frequently asked questions about the implementation of the new regulation. We give you our assessment of its consequences based on available information. Be sure that we will update the FAQ on a regular basis.
Seaexplorer, Kuehne+Nagel’s digital platform for sea liner services, gives you insights into how every vessel carrying your goods will comply with the IMO 2020 regulation by the use of icons for the means of IMO 2020 compliance.
Über IMO 2020
What is IMO 2020?
Since January 1st 2020, all seagoing vessels have to reduce sulphur oxides by 85%. This regulation was set by the International Maritime Organisation (IMO) with the aim of cutting sulphur oxide gas emissions, protecting public health and supporting the environment. Vessels now must use marine fuels with a maximum sulphur content of 0.5% compared to the former limit of 3.5%.
What is the scope of IMO 2020?
The regulation applies globally and throughout the industry to fuels used in the open sea. It affects vessel operators, refineries, and global oil markets. In the Emission Control Areas (ECA zones) an even stricter regulation remains, limiting the sulphur content to 0.1%.
How can vessel operators comply with the IMO 2020 regulation?
Vessel operators have the following choices to comply with the new IMO 2020 sulphur limits:
1. Use Scrubbers
The use Scrubbers (emission cleaning technology) to remove pollutants from the ship’s exhaust allows them to continue using higher-sulphur fuels. However, the process of installing Scrubbers is limited and expensive due to space and capacity constraints, and increases in operating costs. In addition, the price and availability of higher sulphur fuels remain uncertain in the long run.
2. Switch to non-petroleum-based fuels
Operators can switch to non-petroleum-based fuels, such as Liquefied Natural Gas (LNG). This is feasible for newer vessels with appropriate specifications. However, the infrastructure to support the use of LNG is currently limited in scope and availability.
3. Switch to Very Low Sulphur Fuel (VLSF) or MGO
Operators can switch to a Very Low Sulphur Fuel (VLSF) or MGO that complies with the new rules (Most common choice). The cost, widespread availability and specifications of the new fuel for use in marine engines are becoming a new standard. The petroleum Industry adapted refineries and supply chains and is passing these costs on to the market.
By the use of icons for the means of IMO 2020 compliance in combination with the information on CO2 emissions seaexplorer allows you to obtain full transparency on the sustainability of the services.
Who controls the implementation of the IMO 2020 regulation?
The Port State Control of the respective UN member is responsible. They check logbooks, use sniffer devices and sniffer drones.
What will be the fine if a carrier does not comply with IMO 2020?
Depending on the jurisdiction, the penalties are high fines, ship arrest or even imprisonment of the captain.
What are the impacts and risks?
The now implemented IMO 2020 requirement has resulted in a steep increase of fuel prices which are expected to stay volatile for the time being. In the first weeks of 2020, the average price of VLSF fuel oil in Singapore and Rotterdam was around 600.00 US dollars. Several factors, in particular geopolitical events such as sanctions and war, the actions of OPEC (Organisation of the Petroleum Exporting Countries) and the general demand of the world economy for oil will influence the price of crude oil and ultimately the price of fuel products in the future.
At this stage, the new VLSF fuel costs are up to twice as much as the previous used fuels. Due to the significant increase in bunker prices, every company involved in seafreight is confronted with rising and more volatile fuel costs. With the Secured Energy Plan, Kuehne + Nagel offers its customers a risk management tool to secure and set the bunker price at certain levels. The Secured Energy Plan is available for volume contracts from approx. 2,500 TEU. Please ask your local Kuehne + Nagel representative for further details.
Support from Kuehne+Nagel
What is the positioning of Kuehne+Nagel towards IMO 2020?
Shipping per ocean cargo had always been an environmental-friendly way to transport vast volumes of cargo over long distances. IMO 2020 ensures that ocean transportation remains the most environmentally-friendly and sulphur efficient mode of transportation. Kuehne+Nagel welcomes any industry approach to improve environmental protection and fully supports this initiative.
If price negotiations already took place, will Kuehne+Nagel maintain prices?
By default, all fuel prices in the contracts are variable, i.e. they follow the upward or downward movement of the oil price. Since the fourth quarter of 2019 all contracts have already been switched to the IMO 2020 compliant fuels VLSF / MGO for the BAF calculations, which tend to be more expensive than the Heavy Fuel Oil (HFO) previously used.
How will Kuehne+Nagel support me as a customer with regard to IMO 2020?
Our ultimate goal as Kuehne+Nagel is to run our customer’s business best-in-class without disruptions but at competitive prices. We provide you with up-to-date information, transparency and risk management tools, enabling you to react appropriately to possible disruptions in your supply chain. Our experts constantly strive to successfully solve potential IMO 2020 challenges for you. Kuehne+Nagel assures full transparency in fuel consumption reflecting individual trade factors per TEU. To offset any financial risk we offer the Secured Energy Plan to hedge against the volatility of fuel prices.
Please ask your local Kuehne+Nagel representative for further details.
What impact will IMO 2020 have on health and environment?
With the implementation of IMO 2020, the International Maritime Organisation aims to reduce total sulphur emissions from ships by 77% from 2020 until 2025. The overall objective is to reduce the negative impact of shipping on human health by decreasing air pollution from sulphur emissions by 68% globally and in particular in the coastal areas of Asia-Pacific, Africa and Latin America.
Please note that the IMO 2020 regulation focusses on the reduction of sulphur emissions, not on the reduction of carbon dioxide emissions. So there will not be a direct impact on the global warming, but reducing sulphur emissions helps prevent acid rain and combats ocean acidification.
People benefit the most from this. Significant health improvements list the reduction of stroke, asthma, cardiovascular disease, and lung cancer as well as pulmonary disease. The International Maritime Organisation states that more than 570,000 premature deaths can be avoided between 2020 and 2025 due to the new regulations.
[Source International Maritime Organisation - June 2019]
Which is the environmental footprint that my company will have as a customer?
Please see question above: “What impact will IMO 2020 have on health and environment?”
What will be the impact on freight rates and operations?
According to current calculations, the expected increase in costs will have a significant impact on the overall prices of container transportation and on freight rates. Whilst the implementation date for IMO 2020 is January 1st 2020, we anticipate freight rates to increase as early as the end of the third quarter of 2019. Therefore, long-term agreements for both full and part load containers will include a price adjustment method also known as Bunker Adjustment Factor (BAF).
In order to offset price risks associated with the foreseeable increase of volatility in freight costs, Kuehne+Nagel provides the possibility of fix fuel costs up to three years in advance at an upfront payment with the Secured Energy Plan. The Secured Energy Plan is available for volume contracts from approx. 2,500 TEU. Please ask your local Kuehne+Nagel representative for further details.
When and how will the extra costs for IMO 2020 compliance be charged?
The current bunker batch (BUC) takes into account the IMO 2020-compliant fuels.
Is there an extra surcharge on top of the Bunker Adjustment Factor (BAF)?
There are no extra costs apart from the general rise in fuel prices to cover the costs of compliance with the IMO 2020 regulation. Higher fuel costs arise from the consumption of low-sulphur fuels. The energy costs for deep sea transport are referred to as BAF.
How is the BAF calculated?
Freight rates will be determined by a formula based on the recent historic price development (either monthly or quarterly):
FUEL PRICE PER TON x FUEL CONSUMPTION PER TEU (TRADE FACTOR) = FLOATING ENERGY COST
The fuel consumption per TEU is the average fuel consumption on a trade lane considering variables like transit time, fuel efficiency, a severe weather buffer, as well as head haul - back haul Imbalances.
Is there a trend amongst carriers towards complying with the new regulation?
The majority of carriers will use IMO 2020 compliant fuels (VLSF / MGO) to meet legal requirements. Scrubbers are expected to be installed at approximately 10-12% of the global vessel capacity [Source Clarksons Research - June 2019], while LNG technology is still in its early stages.
Are there different cost elements in my cargo contract depending on the technology used on board of a ship to comply with the law?
No, our pricing is based on the use of the globally available, IMO 2020 compliant fuel, namely VLSF or MGO.
What is a Scrubber?
A Scrubber is a device for cleaning the exhaust gases of a ships main engine by pumping water through its funnel. The sulphur and other particles are "washed out", but there are problems with the subsequent handling/disposal of the washing water containing the particles. Several countries, including Singapore and China, have established strict rules for the use of certain Scrubbers (Open Loop Scrubber) and for the treatment of the washed product as toxic waste, making the use of this technology more expensive.
What are the different types of Scrubbers?
In general, there are two types of Scrubbers: those that work in an open system by pumping seawater through the funnel of the vessel, and those that work in a closed system and keep the “washout” on board the ship. However, due to the size and power of the main engines of larger container vessels, the handling of the washout may vary. In particular, the environmental impacts of Open Loop Scrubbers are currently the subject of controversy. Kuehne + Nagel follows the progress of the global container fleet in terms of IMO 2020 compliance and Scrubber installations via its online platform for sea liner services, seaexplorer, and will inform you about the latest developments in this field.
What impact do Scrubbers really have?
Scrubbers are a non-proven interims technology. Only approx. 10 -12 % of the global container vessel fleet is currently equipped with Scrubbers or planned to be equipped with Scrubbers [Source Clarksons Research - June 2019]. The impact of Scrubbers on the environment, ports and coastal waters is debated with controversy.
Amongst others, China and Singapore have already banned open-loop Scrubbers in inland port waters and coastal shipping ECAs as the environmental benefits are questionable. Current knowledge indicates that the use of Liquefied Natural Gas (LNG) is preferable against Scrubbers for the purpose of sulphur reduction.
Can I buy transportation with LNG vessels or vessels using Scrubbers / VLSF or MGO only?
From a price point of view, Kuehne + Nagel does not differentiate whether a carrier has invested in technologies such as Scrubbers or LNG propulsion, or decides to buy cleaner fuel. However, a new feature of seaexplorer provides our customers with an overview of the status and means of compliance with the IMO 2020 regulations for each vessel carrying their goods. By the use of icons for the means of IMO 2020 compliance in combination with the information on CO2 emissions seaexplorer allows to obtain full transparency on the sustainability of the services.
What is the Low Sulphur Surcharge?
In the dedicated Environmental Control Areas (ECA) in Northern Europe, North America and parts of Asia, the use of even cleaner fuel with a sulphur content of 0,1% is mandatory. This fuel is even more expensive and will be priced separately.
Is the Low Sulphur Surcharge (LSF) limited to Intra Asia or does it account for all trades?
The LSF is charged wherever the specific, very clean fuel is used. The focus is on Northern Europe, the USA and parts of Asia.
Can different types of fuel be mixed in one tank?
No. After cleaning the tanks, the operator needs to stick to the cleaner fuel. Otherwise, the tank has to be cleaned again, which is highly costly.
In case refineries will not have the capacity to produce enough low-sulphur fuel oil, would prices increase further?
There is a risk that by January 1st 2020 not enough IMO 2020 compliant fuels will be available in the geographical area where the fuel is needed. This will further increase prices, at least temporarily.
Is there a risk of engine failure due to the use of faulty fuels?
Yes. If fuels are blended inappropriately, sediment will form which can lead to a breakdown of the main engine. Therefore, when IMO 2020 comes into force, transport services may be disrupted due to poor fuel quality or insufficient availability of compliant bunker fuels.
Will there be extra surcharges for large shippers from the carriers/forwarders? As a low-volume shipper, would this have an impact on me?
The IMO 2020 regulation applies to everyone, regardless of the shipped volume. Fuel consumption values (Trading Factors / Bunker Adjustment Factor BAF) apply equally to all too.
Will the available capacity (vessels) for the transporting of my goods be reduced?
Only if the tonnage will have to be reduced for technical changes, such as the installation of a Scrubber, there will be a minor impact on available transport capacity.
Will the transit times / overall Turn Around Time (TAT) of my goods be extended?
So far, we have no information about any planned changes to timetables. However, schedule delays may occur due to insufficient availability of suitable fuels or slower steaming in order to recover the costs for the more expensive IMO 2020 compliant fuel.
Will there be a “grace period” from January 1st for the current 3.5% sulphur being used by ships?
No. All seagoing vessels have to comply with the new rule from January 1st 2020.