Category: Freight Forwarding

The introduction of new IMO 2020 low-sulfur fuels and blanked sailings will dominate container markets in the fourth quarter, according to one leading analyst.

As reported in FreightWaves, shippers and forwarders have expressed confusion over the timing and transparency of new charges now being introduced by container lines as they phase in low-sulfur fuels — and pass on higher costs to customers — ahead of the Jan. 1 mandatory implementation date set by the International Maritime Organization (IMO).

Shippers are also wary that container lines might hike the fuel component of freight to compensate for bearish spot rates.

The latest monthly report from Maritime Strategies International (MSI) argues that liner charges to customers as they introduce the more expensive low-sulfur fuels will define box shipping markets in the coming months, although MSI is skeptical of claims that expected fuel price increases in January will lead shippers to front-load cargoes.

“As January 2020 looms, there is anecdotal evidence that shippers will bear increased bunker components of freight once the industry switches to cleaner fuels,” said the report. “This is admittedly clearer on the trans-Pacific trade, where the prevalence of annual contract arrangements provides better visibility than on other trade lanes including Asia-Europe, where annual contracts are less extensively used by shippers and forwarders.”

After recent spot rates losses on the main east-west ocean trades, analysts are mostly in agreement that further rate weakness is likely, even though carriers are expected to blank more sailings in the coming weeks. Some capacity also will be withdrawn as carriers rush to fit vessels with scrubbers to avoid paying premiums for low-sulfur fuels.

“In the most recent Shanghai Containerized Freight Index assessment, Asia-North Europe spot rates fell to $593/TEU and Asia-Mediterranean rates to $742/TEU, leaving North Europe rates 19% lower than in 2018 and Mediterranean rates 3% lower,” said MSI. “Assessments by Platts and Freightos also point to a marked weakening in recent weeks.”

CMA CGM has now announced a $200 per TEU cut to its published Asia-North Europe rates from mid-October, with other carriers expected to also offer discounts.

Trans-Pacific spot rates also declined during September after a brief rally in late August. “Rates on both U.S. West Coast and U.S. East Coast trades sit 30-40% lower on an annual basis,” said MSI. “Carriers have responded with additional blanked sailings, with the 2M alliance partners the latest to cut capacity.”

As a result, MSI’s near-term outlook for spot rates on the major Asia-Europe and trans-Pacific trades “remains weak,” with the impact of significant blanked sailings deemed “a key variable in the next several months.”

In November MSI predicts average Asia-Europe spot rates of $700 per TEU, although an early lunar new year could lift rates toward the end of Q4.

On the trans-Pacific trade, the picture is more complex due to the “confusing array of different drivers,” including front-loading, new tariffs, old tariffs, seasonal patterns, inventory holdings and the lunar new year.

“Looking at the bigger picture, our view remains much the same,” said the analyst. “Volume growth at the end of 2019 will be negative and likely significantly so to the U.S. West Coast.

“In 2020 the previous year point of comparison for some products will become less challenging, although products targeted in the most recent tariff increases will be more expensive than one year earlier.

“The trans-Pacific’s troubles are here to stay for now.”

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Taking its quest to become a global leader in
electro-mobility and software solutions for vehicles, Traton SE has announced investments of €2 billion
by the end of 2025 in electric and autonomous vehicles.

Chief Executive Officer Andreas Renschler made the announcement
on Oct. 2, 2019, at the company’s Innovation Day in Södertälje, Sweden.

“Our goal is to become the leading provider of e-trucks and
e-buses,” Renschler said. “By 2025, we plan to have spent a total of more than
€1 billion (approximately USD$1.096 billion) in electro mobility.”

Traton, which is the truck subsidiary of Volkswagen AG, will
also invest €1 billion in software to digitize vehicle operations.

“We want to move into the digital fast lane and are
continuing to evolve from a hardware supplier to a provider of software and
services,” Renschler said.

Renschler said customer interest in electric power is
growing, even if the infrastructure is lagging at this point.

“If all necessary prerequisites are in place at the right
time, I expect for our group, that in the next 10 to 15 years, every third of
our trucks and buses can have an alternative drivetrain, most of them fully
electric,” Renschler said. “One of the prerequisites is that the infrastructure
for alternative fuels and electricity must be fully available to guarantee
seamless operation.”

Renschler noted that the total cost of ownership for battery-powered
vehicles used in distribution services and city buses “will be comparable with
vehicles powered by fossil fuels.”

Traton is leveraging its three brands – MAN, Scania and Volkswagen
Caminhões e Ônibus, to spread development costs out. A common modular electric
powertrain toolkit will be used to produce the first serial all-electric city
buses put into operation by Scania and MAN, Christian Levin, chief operating
officer, explained.

“It can be individually modified depending on the brand and
area of use. As a result, a maximum number of individual solutions can be produced
with a minimum number of components and costs,” he said.

In Brazil, Volkswagen Caminhões e Ônibus has announced the
formation of an e-consortium at is Resende development and production complex.
The e-consortium will manufacture, set up charging infrastructure, and manage
the lifecycle of battery packs in electric trucks deployed throughout Brazil.

Those trucks will include current 11- and 14-ton electric models
and the new Volkswagen e-Delivery 4-ton model.

“Our team has conceived and built a pioneering technological
configuration and a business model that will enable us to introduce our range
of commercial electric vehicles on the world’s transport market,” Roberto
Cortes, president and CEO of Volkswagen Caminhões e Ônibus, said.

The e-consortium includes seven suppliers that will share in
the responsibilities of building the vehicles, the company said. Partners include
Siemens, which provides the charging infrastructure and equipment, and supplies
electrical energy to the client; CATL and Moura, which are responsible for
distribution, management and maintenance of the battery packs; Bosch, WEG and
Semcon, which will share responsibility for developing and supplying
components. 

That e-consortium will provide primary support for Ambev, a
Brazilian beer and beverage producer that has already placed an order for 1,600
electric trucks.

Traton has invested millions already into its software capabilities.
In 2016, it created the digital brand RIO, which develops digital services for logistics.
There are more than 115,000 trucks connected to its open, cloud-based platform
and the company considers software to be more important in the development of
autonomous vehicles than the vehicles themselves.

Part of that digitalization effort is the continued
development of a common autonomous driving platform. Levin said vehicles have
already been delivered and testing is ongoing.

Scania unveiled a concept vehicle last week, the AXL. The
vehicle has been engaged in testing in the Rio Tinto mine in Australia since
2018. Featuring no driver’s cab, the AXL is monitored by a logistics system
that tells it how it should perform.

“With the Scania AXL concept truck we take a significant
step towards the smart transport systems of the future, where self-driving
vehicles will play a natural part,” Scania’s President and CEO Henrik
Henriksson said. We continue to build and pilot concepts to demonstrate what we
can do with technology that is available today. “ 

Later this year, Scania expects to put into operation an
electric and autonomous bus to transport passengers in Nobina, which is part of
the Stockholm metropolitan area.

MAN is also engaged in autonomous projects. It will
introduce self-driving trucks in the port of Hamburg in a few months. The
trucks will be driven by drivers on the highway, in some sections in highly automated
mode. Once at the port, the driver will exit the vehicle and the truck will
continue to drive autonomously to the Altenwerder container terminal, where it
will be autonomously unloaded before driving back to the driver on its own.

Not all the innovation will fall to electric. Traton said
that “highly efficient diesel drive systems, alternative drives and fuels like
biofuels, ethanol or the gas technologies LNG and CNG as well as hybrid and
plug-in hybrid solutions are playing a major role in efforts to reduce CO2
emissions.”

Renschler concluded his remarks by urging leaders in each
country to create an “incentive program for electric commercial vehicles and a
European master plan for charging infrastructures.”

Shippers and forwarders want more detailed explanations of the charges being levied by container lines as they phase in new low-sulfur bunker fuels ahead of the Jan. 1, 2020, International Maritime Organization deadline.

“It’s very difficult to understand the charges,” Jordi Espin, policy manager for maritime transport at the European Shippers’ Council, said. “There are so many different charges from lines that we need more explanation behind them.

“At the moment shippers are just being served with fees and told they must pay for ‘sustainability.’

“It is important that shipping lines, who are the ones facing this drastic change, invest effort in explaining how all these formulas translate into the real world. This is what we need,” Espin added.

The CEO of a leading Hong Kong-based forwarder told FreightWaves new liner charges were confusing. “We are bewildered,” he said. “It’s almost like they are designed to confuse. And they are totally different for each line.

“How are we supposed to pass these costs on to our customers and explain the amounts when we don’t understand them ourselves?”

Espin said he was concerned some lines could use the transition to low-sulfur fuels as a profit center. “Not all of them, but some of them might,” he told FreightWaves. “We have seen this before with BAFs (Bunker Adjustment Factors) and surcharges which sometimes seem to have been used to compensate for low rates, so it is something we’re watching.

“We also can’t understand why there are charges now before the new rules are in place.”

Even before the attacks on Saudi oil fields drove up fuel prices, analysts estimated that the extra annual fuel bill for container shipping associated with the move to IMO 2020 low-sulfur bunkers would total approximately $10 billion to $15 billion. Given that the container shipping industry registered a total profit of circa $1.5 billion last year, lines are understandably eager to pass on the full costs of the hikes to customers. However, they have taken varied routes to covering the heightened costs.

For example, Taiwan-based Evergreen Line, a member of Ocean Alliance, will from Oct. 1 enforce an array of new low sulfur charges on U.S. shipments. Its Low Sulphur Fuel Charges (LSS and LSS/L) have also been replaced by a Low Sulphur Fuel Compliance Charge (LSFCC), now renamed the IMO Sox Compliance Charge (ISOCC).

The weekly price gap between CS 380 (IFO 380) and the new 0.5% Sulphur Marine Bunker Fuel will be used by Evergreen to establish separate charges for West Coast and East Coast All-Water Services.

Evergreen said it would assess its fuel usage as a percentage of total voyage costs and factor in the imbalance ratio between Transpacific eastbound versus westbound and “other factors affecting fuel consumption,” using an average in “the interest of uniformity and price predictability.”

It will also use an index “based on averaging of carrier costs per container per voyage assuming specific fuel price levels.”

It is how these carrier-assessed costs are formulated and passed on to customers that is causing so much consternation among customers.

“The supply chain is so fragmented from the buyer to the consumer and by trade that a higher level of transparency is needed. Shippers need to know how all these factors that have a bearing on fuel usage are being passed on,” Espin said. “They are all taking very different approaches.”

A representative for Hapag Lloyd told FreightWaves the carrier would start using low sulfur fuel during Q4 and pass on its higher costs to customers via its Marine Fuel Recovery (MFR) mechanism. “The MFR, which will be reviewed quarterly – or monthly if fuel price fluctuations are above USD 45 per ton – takes into consideration various parameters such as the vessel consumption per day, fuel type and price, sea and port days, and carried TEU.”

Maersk will adjust its Bunker Adjustment Factor (BAF) based on the price of low sulfur fuels from Jan. 1 for long-term contracts of more than three months.

“For our spot business and shorter contracts of less than three months we will introduce an Environmental Fuel Fee (EFF), a mechanism to recover the extra costs of the more expensive IMO2020 compliant fuel,” said a spokesman. “On Sept, 11, 2019, we informed our customers about the mechanism, which takes effect on Dec. 1, 2019.

“As with our Bunker Adjustment Factor (BAF) mechanism for long term contracts, the EFF is centered around providing predictability in calculating the price of shipping with Maersk.”

FreightWaves articles by Mike

The World Trade Organization (WTO) cut its 2019 forecast for trade growth in half due to slower global economic growth and ongoing political issues of U.S.-China trade relations and the U.K.’s pending departure from the European Union.

While 2020 is expected to be stronger, the WTO warned that its member nations will have to create a more stable business climate for trade to grow again. 

The Geneva-based group charged with enforcing the rules set out in trade agreements said trade in real goods is expected to rise 1.2% this year, compared to an earlier forecast of 2.6% made in April.

The first half of 2019 saw export and import volumes rise 0.6% from a year earlier, a “substantial slowdown compared to recent years,” the WTO said.

North America remains the standout among regional economies for its trade growth. It had the fastest export growth in the first half of 2019 at 1.4%, while import growth was 1.8%. 

Europe saw smaller growth in exports and imports, rising 0.7% and 0.2% respectively in the first half. Asia’s exports grew 0.7% and imports suffered a 0.4% decline.  

As the fourth quarter could surprise in either direction, 2019 trade growth could fall within a range of outcomes from 0.5% to 1.6% growth, the WTO said, if trade tensions continue to build, or if they start to recede. 

The new trade forecast is based on a downgraded forecast for global gross domestic production (GDP) of 2.3%, down from an earlier forecast 2.6% growth in 2019.

The weaker GDP forecast reflects the regional and cyclical slowdowns across the world. The European Union saw its economy slow down in the second quarter, led largely by weakening industrial production in Germany. China’s 6.2% GDP growth in the second quarter was its slowest in 27 years. The U.S. economy is expected to see 2.1% GDP growth in the third quarter, according to the Atlanta Federal Reserve Bank.

WTO Director-General Roberto Azevedo said the weaker economic and trade outlook “is leading some businesses to delay the productivity-enhancing investments that are essential to raising living standards.” It is also creating a negative feedback loop as “job creation may also be hampered as firms employ fewer workers to produce goods and services for export,” he added. 

“Resolving trade disagreements would allow WTO members to avoid such costs,” Azevedo said. 

The 2020 trade outlook was also trimmed from 3% to 2.7%. The WTO said that the actual outcome could fall anywhere from 1.7% to 3.7%, depending on how the global economy performs next year. The WTO said that the “risks to the forecast are heavily weighted to the downside” due to the potential for further tariffs, changes in monetary and fiscal policies, and the inability of the U.K. to extricate itself from the European Union.

Logistics giant Deutsche Post DHL Group announced its new five-year group strategy where it has set aside €2 billion ($2.178 billion) for investing in the end-to-end digitalization of its logistics operations. Titled “Strategy 2025 – Delivering excellence in a digital world,” the company seeks to hold on to its considerable market share by channelling greater transparency and visibility into its value chain. 

“Deutsche Post DHL Group has never been in better shape. We are convinced that future growth will come from a consistent focus on our profitable core logistics businesses – and digitalization will become the greatest lever. We need not reinvent ourselves, we will digitalize ourselves,” said Frank Appel, CEO of Deutsche Post DHL Group, while presenting the new strategy at Frankfurt, Germany. 

The DHL Group consists of five distinct and diversified logistics portfolios that include Post & Parcel Germany (P&P), Express, Global Forwarding, Freight (DGFF), Supply Chain and eCommerce Solutions. The common denominator of future growth in all these segments is unsurprisingly dependent on the continued expansion of the ecommerce market, which has opened up opportunities in end-to-end logistics operations like first-mile, warehousing, last-mile delivery, and even returns’ logistics. 

The evolution of consumer expectations in the context of expedited delivery has forced companies like DHL to look at digitalization as a necessity rather than as an option. The company understands that if it does not adapt to the changing logistics landscape or fails to recognize the ‘Amazon Effect’ that defines modern-day supply chains, it will be left behind in the rat race that is geared towards making shipping faster than ever. 

The €2 billion allocated for digitalization will be spent over the next five years, with the amount already being included in the company’s planned Opex and Capex spending. DHL hopes to realize at least €1.5 billion in annual run-rate benefits by 2025. That apart, the company has set a financial target of growing its group earnings before interest and taxes (EBIT) to at least €5.3 billion by 2022. 

Though digitalization as a strategy is now officially a part of DHL Group’s five-year plan, the logistics major had consistently shown interest in adapting to technological disruption over the last few years. 

In the logistics landscape, the threat of Amazon looms large. Amazon has made its intentions clear on expanding its services from the current fulfilment centers it operates to the last-mile delivery segment. This would pose a direct competitive threat to incumbent logistics forwarders like DHL, which will have to digitalize and automate large swathes of its value chain to continue staying relevant. 

Warehouse automation through floor robots is a part of the wider modernization drive within DHL, as the company looks to integrate new technologies within its workflow and also offer employees targeted advanced training to bring them up to speed. 

“Moving forward, we will bundle our technological capabilities as a Group in global Centers of Excellence. Here we will centrally develop key technologies like Internet of Things, or IoT, and then provide them to our divisions. This way, we can leverage the strength of our Group to push forward our digitalization,” said Appel.

A no-deal or disruptive U.K. exit from the European Union (EU) will have catastrophic implications for Europe’s trucking companies, according to Boris Blanche, managing director of the International Road Transport Union (IRU).

Blanche, who previously highlighted how driver shortages in Europe are becoming “a real and growing threat,”  believes there is now a real danger that the EU and U.K. will not agree a deal by the October 31 deadline, resulting in the U.K. crashing out of Europe’s customs union and single market.

“Road transport is the first and last leg of every journey and its impact touches every aspect of our daily lives,” he told FreightWaves. “A no-deal Brexit or a deal that wasn’t favorable to the road transport industry would inevitably cause disruption and administrative burdens for operators. This disruption will impact the economy, businesses and, ultimately, consumers at the till.”

The U.K. government recently admitted a no-deal Brexit from the EU could see truck flows on English Channel tunnel and ferry routes cut to just 50 percent of current levels for three months, while truck drivers could also face delays of up to 2.5 days before crossing into France. 

Blanche notes that between 7,000 and 10,000 trucks use the Calais-Dover route alone and, in the 12 months ending in June 2019, 3.5 million road goods vehicles traveled from Great Britain to Europe.

“Without a customs union, the U.K. and EU must take steps to minimize disruption and prevent truck shortages from occurring due to buildups at the borders,” he said. “It’s vital that the U.K. and EU offer operators clarity on the situation as quickly as possible and allow a transition period lengthy enough for them to adapt. In the case of a no-deal Brexit, a transition period of at least 12 months would be required.”

Given the current political mess in the U.K., an organized transition seems unlikely. Indeed, it is the swirling confusion around Brexit and its many possible outcomes that has made it so difficult for shippers and trucking companies to prepare adequately.

“At the moment there is insufficient information available on what Brexit means and how to prepare for it in a cost-efficient way,” said Blanche. “That’s why the IRU is working closely with high level representatives from both the U.K. government and the EU to provide recommendations for potential solutions and ensure the provision of sufficient, reliable information for businesses.”

In Blanche’s view, there is no better solution than maintaining the single market and customs union in terms of the seamless transport they offer once Britain has left the EU. However, given that the current U.K. government has rejected any deals that include maintaining membership in both trade arrangements, Blanche believes fallback options are still available to policymakers.

“TIR (Transports Internationaux Routiers Convention) for instance, is a ready-to-use solution for customs transit,” he suggested. “Today, over 10,000 transport and logistics companies use TIR to quickly and reliably move goods across international borders, so we know that the system operates in an effective and efficient way.

“However, the introduction of TIR in the U.K. will require a market access regime, which would most likely involve permits, and it is therefore vital that a long enough transition period is put in place for operators and transport companies to adapt to the change.”

Blanche added, “Alternatively, the U.K. could remain a member of the New Computerised Transit System (NCTS).”

More FreightWaves articles by Mike

Autonomous driving took center stage at the Auto.AI Europe conference in Berlin, as experts within the automation landscape spoke on the technology’s potential as a game-changer in the future of mobility. Stephen Janouch, senior manager of business development at Green Hills Software, delineated the importance of security in automotive systems as vehicles become increasingly self-reliant. 

“Automotive security is like the dirty laundry you have in your basement. You hope someone else is taking care of it, but at the end of the day, you may need to take a look at it yourself,” said Janouch. “And it is important to know the difference between safety and security. Safety on one side is making sure that the system is behaving according to what you want it to do. Security is about making sure that no human can harm the machine and make it do something you didn’t tell the machine to do.”

Janouch pointed out that if an autonomous vehicle is not secure, it cannot be 100% safe. Security is a complicated issue, as the processes to make a vehicle secure are never-ending, and require companies to stay ahead of hackers by constantly updating their security policies and testing their vehicle software for chinks in their armor that may not be apparent. 

Prevention, Janouch contended, is about companies approaching security from an “inside-out” perspective. “We propose that you start from the lowest level of a system – the hardware and operating system – and then work your way upwards and apply security measures on each level,” Janouch. 

The complexities around connected vehicles that are in service today make it an uphill task for companies to make them hack-proof, with Janouch pointing out the futility in trying to build firewalls around them. “Where could you actually build your firewall around the system? What does a system mean, is it just the vehicle?” he asked. 

To reduce security threats and vulnerabilities around a vehicle, it is critical to cut down the complexities behind software systems running the vehicle. The problem mushrooms out from the way the code is written. Janouch spoke of a situation he had encountered, in which a client building a vehicle camera system approached his company with issues revolving around a staggeringly long software code. 

“He gave us a video driver with 250,000 lines of code. The supplier probably brought it down to 50,000 lines of code, hoping that could be sufficient. In the end, we rewrote the driver to nearly 100% of the functionality with everything vital for the operation of the system, and brought the length down to 900 lines of code,” said Janouch. 

Reducing the absolute length of code is essential, as the longer it gets, the higher the probability of security concerns creeping in. “Typically, every 1,000 lines of code could end up with two defects. Though that doesn’t sound like a whole lot, a high-end car will have about 100 million lines of code, and that would mean around 200,000 defects in the software. Hopefully, none of it is really affecting safety, but it still is a lot,” said Janouch. 

To make systems more hacker-proof, it will be prudent to identify critical parts of system code, separate them from untrusted code and auxiliary system code, and apply strict access control to the critical systems. This is akin to getting access to an office building. Though nearly all would have access to the building’s main entry door, only certain people would have access to separate floors within the building.

“Communication needs to be separated as well. You want to make sure that information transferred from a signal that directly affects the system’s vital behavior is not affected when someone does a download,” said Janouch. “The key thing here is the operating system, which is the lowest level of software and practically the last line of defense against anyone trying to hack the software.”

Ultimately, security is a never-ending process and automobile software developers will have to comprehensively plan for security firewalls right from the vehicle’s inception and not wait until the vehicle functionalities are fully developed – as it is somewhere between “very difficult and impossible” to add security at the later stages of the development process. 

Air and ground express firm DHL Express announced September 27 a 5.9% general rate increase on shipments moving to and from the U.S., effective January 1, 2020.

The increases are for tariff, or published, rates. Contract rates will differ depending on the specific customer. However, contract pricing in the express delivery business is influenced by the level of tariff rates in effect at the time. In addition, the actual tariff rate charged for transporting a shipment will vary depending on the shipment’s “profile,” such as weight, dimensions, length of haul and any special handling. DHL Express’ 2020 service guide, which will contain more detailed pricing information, has yet to be made public.

DHL serves the U.S. from international markets only. It ceased domestic U.S. pick-ups and deliveries in January 2009. DHL serves more than 220 countries and territories.

Rival FedEx Corp. (NYSE:FDX) has already announced its 2020 rate structure, with the average tariff rate increasing by 4.9%. UPS Inc. (NYSE:UPS), another DHL rival, has yet to disclose its 2020 rates.

Separately, global trade activity is likely to decline from already-muted levels through November, according to the latest version of DHL’s global trade outlook, which was published September 26. The overall index fell by one point from the last version, settling at 47. This indicates that global trade will continue to lose momentum over the next three months.

A reading of 50 is the baseline for growth. Of the seven countries that were canvassed, only Japan and the U.K. showed readings above 50. The United States, China, India, Germany and South Korea all posted negative readings, according to the report. The seven countries, and the 10 industries profiled, account for about three-quarters of all global trade.

Airfreight accounted for most of the overall decline, falling 4 points from the last reading in June to 45. Ocean freight remained steady at 48, the report found. Chinese airfreight activity showed the most glaring weakness, down 8 points to 43. Japanese ocean freight, by contrast, gained 6 points to 55 due to a strong outlook for raw materials exports.

The overall weakness was attributed to the usual suspects: The U.S.-China tariff battle, uncertainties over Brexit, and weakness in European economies, especially those like Germany that rely on exports to China.

The one bright spot is that the pace of decline slowed considerably from June, when the broad index toppled eight points to 48.

It’s going to be a very tough transition to the low sulfur world, ocean shipping experts believe. And that’s because the availability of low sulfur fuel is “uncertain”, the use of scrubbers is unsustainable and ocean going ships will quickly burn through low sulfur stockpiles.

High demand, restricted supply and a run-down of stockpiles equals one sure consequence: a price spike.

“Prices will go through the roof,” one ocean shipping expert told FreightWaves at the side of the Marine Money Week Asia 2019 conference, which was held this week in Singapore.

Oil, sulfur and air pollution

Ocean going ships today normally burn residual fuel oil, which is basically a near-waste material that’s left over after crude oil is refined into substances such as gasoline, kerosene and other petrochemicals.

Burning residual fuel oil releases lots of sulfur dioxide. And it’s very nasty stuff.

Breathing sulfur dioxide irritates the body’s internal air passageways, causing coughing, wheezing, shortness of breath. Inhaling sulfur dioxide makes breathing more difficult and it’s particularly hard on people with asthma.

Sulfur dioxide in the air also leads to the formation of sulfur oxides (SOx) and these react with other chemicals to form super-tiny specs of dust called “particulate matter”. These tiny particles penetrate deeply into the lungs and into the bloodstream. They cause irregular heart beats, inflammation of internal organs, decreased ability to breathe and heart attacks.

Worse, every year we, the human population of Earth, suffer a massive, preventable and tragic disaster because repeatedly breathing particulate matter is deadly.

Scientists reckon that, every year, breathing ship-source emissions causes over 400,000 early, and preventable, deaths.

Sulfur dioxide also gets absorbed into water in the air and falls to the ground as acid rain. That kills forests, kill fish in lakes and streams, and damages crops.

And that’s why the IMO has acted to ban the burning of high sulfur fuel oil. As of January 1, 2020, ships will be forbidden from burning fuel oil with more than 0.5 percent sulfur content. Certain other specially protected and pre-existing Sulfur Emissions Control Areas, such as the English Channel, the North Sea and the entire coast of continental USA (excluding Alaska) will have an extra-low level of 0.1 percent. The Sulfur Emissions Control Areas were set up in July 2010.

Low sulfur fuels

There are a few ways to comply. Ships can use fuel that basically does not have any sulfur in it. One compliant fuel is liquefied natural gas. But, at minus 260 Fahrenheit, LNG is very difficult to handle and it requires a lot of technical skill to do so. There are only about 600 or so such ships in the world fleet, according to David Jordan, regional director Asia at commercial shipping consultancy MSI. And most of those ships are LNG carriers. Although LNG looks like it may be a major fuel type for ocean going ships in the future, it is not today.

Another way to comply is to use low sulfur fuel. Unfortunately for the U.S. trucking industry, refiners that have been producing low sulfur diesel will likely use the same feedstock to create low sulfur marine fuel. There is limited capacity to produce both types of fuel.

“IMO sulphur regulations… have the potential to be highly disruptive to the pricing and availability of compliant fuels,” says analyst company Wood Mackenzie. It adds that a growing demand for distilled fuels could “result in an upward price pressure on fuels such as diesel and jet fuel. Knock-on effects from the upcoming cap on sulphur emissions in marine bunker fuel could even wind up giving you a more expensive plane ticket in 2020”.

Thirsty? Drink up! Drink up… 3.5 million barrels of oil

The potential for disruption is so great because ocean going cargo ships are so very, very thirsty.

In 2018, the global maritime sector had a demand for high sulfur residual fuel of about 3.5 million barrels a day out of a total demand of about seven million barrels a day i.e. the maritime sector accounts for about half of total fuel oil demand.

“And the global refining system is not yet equipped to make this volume of residual fuel oil at 0.5 percent sulfur once the regulation goes into effect,” says independent corporate consultant McKinsey.

There have been a fair few media reports of traders and some shipping companies buying up stocks of low sulfur fuel oil. While traders will probably make a killing on a likely upsurge in low sulfur fuel prices, the source scoffed at the idea that any reserve of low sulfur fuel could bolster supply to, and ameliorate prices for, the maritime industry.

“Any stockpile will evaporate within a month – it’s a tiny, tiny drop vis-a-vis the size of the world fleet,” he said.

High demand plus low supply equals price spike

FreightWaves’ Craig Fuller also notes that the current U.S. consumption of ultra low sulfur diesel is about 4.1 million barrels a day. And, he adds, although only some demand will be met from the U.S., “the demand for refined and low sulfur fuel will be roughly equivalent to 80 percent of the consumption of the U.S. market”.

IMO 2020 will likely lead to a fuel price increase.

“Because of IMO 2020, estimates of an increase in wholesale ULSD prices range from $0.22 to $0.50 per gallon. The current average ULSD wholesale price is $1.89 per gallon; the estimated increases translate to a 12 percent to 26 percent increase in the cost of ULSD diesel from the refineries. Once the ULSD makes its way into the hands of the retail market, which currently sits at $3.05 per gallon, it could drive diesel prices north of the highest prices seen in the U.S. market in the past year – over $3.55 per gallon, and in parts of Northern California $4.60 per gallon,” Fuller writes.

Scrub-up

The third way to comply is to use exhaust gas cleaning systems, which are commonly known as “scrubbers”. Roughly speaking, sulfur in exhaust gases is attracted to seawater, which is alkaline (which is the same as  “basic” as in “acid” and “basic”). The scrubber sprays seawater as a mist into the exhaust gases. The sulfur binds to the seawater and the waste stream is discharged into the sea.

However, ocean going shipping experts do not see scrubbers as a viable solution.

“Scrubbers won’t work,” one executive told FreightWaves at the Marine Money Week Asia 2019 conference in Singapore. He did not mean that they do not physically or economically work, he meant that they are not a long-term solution to the problem of sulfur in fuel.

As at April 1, 2019, there were just over six hundred ships fitted with scrubbers according to data company IHS Markit. And there were a further 1,674 ships due to be fitted with scrubbers. That’s about 2,300 or so scrubber-equipped ships.

In any event, not all of those ships will have scrubbers fitted in time for the IMO 2020 deadline.

Singapore-based Quantum Pacific Shipping is a large ship owner that put a lot of money down on installing scrubbers across its fleet. Kenneth Cambie is Quantum’s chief financial officer. He explained the company’s thinking at the Marine Money Week Asia 2019 conference. Owing to the large number of ships it owns, Cambie explained, Quantum Pacific Shipping had to look ahead.

“We saw scrubbers as a good bridge to LNG. Scrubbers get us through the price and uncertainty of supply… scrubbers work but they’re not a long term solution,” he told the conference.

Cost and the scrubber order book

Scrubbers cost up to about US$5 million, although that will vary depending upon the exact type of scrubber and the type of vessel that it is installed upon. The scrubber price tag is significantly less for smaller vessels. Sebastian Blum, director maritime industries, with KfW IPEX-Bank, told the Marine Money Week Asia conference that about US$500 million has been spent on buying scrubbers between 2015 to 2019.

The number of scrubber equipped ships is tiny as a percentage of the world fleet. While estimates of the size of the world fleet will vary, the number of individual ocean-going ships in the world fleet is in the range of 90,715 (Equasis; 2017) to 94,169 (UNCTAD; 2018) ships.

That puts a rough estimate on the size of the scrubber-equipped fleet as a percentage of the world fleet at about 2.4 percent.

And the latest intelligence suggests that there won’t be an upsurge in scrubber orders. It’s very much the opposite. The number of scrubber orders may have dried up. KfW IPEX-Bank’s Blum provided some insight. He told FreightWaves that “nothing happened” between 2015-2018 and that most of the early-bought scrubbers were installed on ships deployed on routes through the Sulfur Emissions Control Areas.

Eirik Dahlberg is the general manager of Clean Marine, a supplier of scrubber systems. He was on a panel at Marine Money Week Asia 2019.

“It was in 2018 where everything took off. We were at 150 contracts. Then it stopped. Ship owners saw that they could not receive vessels or retrofit ships in 2019. Ship owners then climbed up onto the fence…”.

A good example of that was given by Graham Porter, one of the founders of Seaspan Corporation (NYSE: SSW). He told the Marine Money Week Asia conference: “we’re not a believer in scrubbers so we’ve taken our chips off the table and [we will] wait”.

Why would they, just for you? They wouldn’t!

An insight into how ship owners are thinking was provided by the FreightWaves source. He pointed out the nature of the marine fuel supply chain makes it unlikely that there will even be a continued supply of high sulfur fuel oil to be fed into scrubbers.

“Longer term, low sulfur fuel oil will become the norm, just like unleaded, right? Look at the bunker [marine fuel] supply chain. I’m not talking about the big boys like Shell, I’m talking about the small operators. They’ve got, what, four or five tanks on the land side? And they have a max of a bunker barge, or two, maybe three?

“If you want high sulfur fuel oil delivery for your scrubber system ship, then they [the bunker supplier] have to keep a quarter to a fifth of their capacity separate because you don’t want to mix fuels.

“Why would they block up to one quarter to one fifth of their capacity just for you? Low sulfur fuel will become normal, so why would they keep off-spec fuel just for you? Especially when you, as a market share, represent less than five percent of the market. Why would they? They wouldn’t.

“And don’t tell me that bunker pooling will work. It never will. The bunker people hate each other.

“Ship operators tell me they don’t really care about scrubbers. They just want to get their money back on the scrubber system in five or six years. After that, once it’s settled down, they’ll just switch to low sulfur.

“They’re just trying to avoid the likely price spike for low sulfur fuel… pricing is just going to go through the roof.”

Marine Money granted a complimentary invitation to Jim Wilson to attend its Marine Money Week Asia 2019 conference in Singapore; FreightWaves paid for all travel and accommodation expenses.

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