THE COSTS OF international shipping, even those unrelated to the direct costs of moving goods, always seem to come back to rest with the shipper in the form of surcharges.
So it no surprise to see shipping lines advising that shippers must bear the cost of the vessels using low-sulphur fuels, as carriers adjust to tougher environmental laws.
New international standards which come into effect in three months time will basically see ships go from burning heavy fuel oil to what is pretty much diesel in some areas of the world that lie on major shipping routes.
I first came across a low-sulphur surcharge (LSS) in a customer advisory from Maersk Line which said it was introducing it to offset additional costs incurred by switching to cleaner fuels in Emission Control Areas (ECAs), as required by international environmental regulation effective from January 1, 2015.
“We believe that a separate surcharge will provide better transparency to our customers on the additional costs arising from the new environmental requirements than if we had integrated the costs into our existing bunker surcharge (SBF), as previously communicated,” the line said.
The surcharge will affect all trades with origin and/or destination in ECAs. In Maersk’s case, the LSS surcharge level will apply equally to dry and reefer cargoes. The surcharge level will vary based on the additional costs for low-sulphur fuels for the particular trade lane.For New Zealand shippers, in the Oceania-Europe trade it is US$30 per 40ft container, and the same level applies in the Oceania-North America trade. Maersk says its surcharge levels will be reviewed quarterly and will be adjusted to reflect the current cost for low-sulphur fuels.
Other lines are doing the same. When I researched what was happening elsewhere in the world, I came across several examples of lines treading a similar pathway.
Orient Overseas Container Line (OOCL) has also unveiled plans to begin levying a surcharge for voyages that pass through ECAs from January 1. The actual amount levied will be determined by the length of the voyage through an ECA.
“At this time, it is very difficult to predict the exact financial impact of this new regulation due to the unpredictable and fluctuating nature of fuel prices on our operations,” OOCL said in a statement.
MSC and Hapag-Lloyd announced earlier this year they would be hitting shippers with surcharge. MSC, like Maersk, have put dollar figures on it, which varies to an upper limit of US$165 per TEU. So why is this happening and who is initiating the ECAs?
The drive to lower emissions from sea trade is being controlled by the International Maritime Organisation (IMO), the United Nations agency which promotes maritime safety. The IMO has 167 member states, so its authority is recognised. As of May 2013, 152 states, representing 99.2% of the world’s shipping tonnage, were parties to the emissions-control convention.
IMO ship pollution rules are contained in the International Convention on the Prevention of Pollution from Ships, known as MARPOL. MARPOL Annex VI sets limits on NOx (nitrogen oxide) and SOx (sulphur oxide) emissions from ship exhausts and prohibits deliberate emissions of ozone-depleting substances.
SOx emissions are toxic and cause respiratory problems as well as acid rain. Annex VI introduced what were known as Tier I standards in 1997. These were subsequently updated by
Tier II and Tier III standards in 2008, which applied new fuel quality requirements from July 2010.
While these emission and fuel quality requirements set the global standards, the ECAs are an extension of this clean air strategy to specific geographic areas deemed to be particularly conscious of the contribution of the shipping industry to local air pollution.
An ECA can be designated for SOx and PM (particulate matter) or NOx, or all three types of emissions from ships.
From January 1 new legal requirements will come into force in ECAs in North Europe (including the Baltic Sea, North Sea and English Channel) and North America (within 200 nautical miles of the American and Canadian shore), which will lower the maximum allowed content of sulphur in fuel burned in the those areas to 0.1% from today’s 1%.
All shipping services crossing those areas will be required to use fuel with the reduced sulphur content. The net effect will be that sulphur emissions from ships will be reduced by 90% in the ECA areas.
That sets the regulatory background. The cost implications arise because fuel with a sulphur content of 0.1% is significantly more expensive than fuel with a 1 % sulphur content required in ECAs today.
Calculating the surcharge level is complicated as the amount of low sulphur fuel used depends on the time spent and distance travelled within the ECAs. That explains why the MSC surcharges vary widely. The higher surcharges will apply in areas where MSC ships spend a lot of time within an ECA.
OOCL is approaching the maths in a different way.
It says that “once the new regulation is in effect, it is our intention to adjust our bunker adjustment factor (BAF) formula to incorporate the new fuel costs, using the actual ratio required on the round voyage“.
Maersk estimates that based on the current price difference of US$260 per ton, the additional cost to it is around US$200 million per year. Elsewhere in the world, stricter emission control standards are also becoming common. Hong Kong requires vessels to use low-sulphur fuel while at berth but subsidises 50% of the costs.
Neighbouring Shenzhen has also announced plans to encourage lines to switch to cleaner fuel while berthed, initially offering to pay 75%-100% of the extra costs to get the initiative off the ground.
From a shipper’s viewpoint, the end game, of course, is that they have to pay the surcharges. Some are unhappy, saying that by slow steaming, the carriers are already making huge savings at the expense of their customers.
The Global Shippers’ Forum (GSF) is calling for shippers’ carbon reporting requirements to be fully considered as the maritime sector develops technical and operational measures to reduce emissions.
The IMO’s Marine Environment Protection Committee is meeting about the time this article is published, and the GSF is supporting progress towards establishing a data collection system for ships to measure maritime emissions.
Its goal is a pragmatic and practical data collection system based where possible on actual fuel consumption and distance travelled. The GSF says this will help identify where emissions need to be cut while assisting shippers in making carbon-efficient supply chain decisions.
Ultimately a global reporting system for ships is required as shipping remains a global industry.
I will try to keep tabs on what happens at the IMO, because whatever transpires about emissions control it will impact on shippers here too.