As global shipping sails into ‘greener’ future, trade faces further pressure

The global shipping industry will embark on a “greener” journey from Wednesday as a new rule mandated by the International Maritime Organisation (IMO) on using low sulphur fuel oil to cut ship emissions takes effect, raising ocean haulage costs for exporters and importers.

While the new rule has been discussed for a number of years to iron out the concerns of the stake holders on the availability of compliant fuels and ways to continue using high sulphur fuel oil without attracting penalties, its actual implementation comes at a time when the global economy is slowing, dealing a blow to the already floundering fortunes of exporters and importers, including those in India.

To add to the woes, the rate hikes secured by many of the major Indian ports in the last two months will exert further pressure on India’s EXIM trade, says industry sources.

The new rule will raise freight rates for moving bulk commodities as well as goods shipped in containers, as fleet owners pass on to customers the higher cost of burning low sulphur fuel oil.

To recover the extra costs of low sulphur fuel, fleet owners have started collecting or will start charging Environmental Fuel Fee (EFF) / Lower Sulphur Surcharge (LSS) / Bunker Adjustment Factor from customers.

International maritime transport carries around 90 per cent of the global trade and is currently responsible for approximately 2 per cent of the world’s CO2 emissions, according to BIMCO, the world’s largest shipping association.

The new requirement means that the global limit for sulphur in fuel oil used on board ships has to be reduced to 0.5 per cent m/m (mass by mass) to cut sulphur emissions by 85 per cent.

Till today, the maximum sulphur limit in fuel oil globally is 3.5 per cent. Ship fuel or bunkers account for as much as 40 per cent of the operating cost of a vessel.

Top global fleet owners such as Frontline Ltd, Scorpio Bulkers Inc, Stena Bulk A B, Norden A/S, Star Bulk Carriers Corp, DHT Holdings Inc and CMA CGM have retrofitted some of their bigger ships with exhaust gas cleaning systems or scrubbers instead of using high cost, low sulphur fuel to reap the benefit of a steep price differential between high and low sulphur fuels, which currently hovers in the range of $300 a tonne.

Back home, the Great Eastern Shipping Co Ltd has fitted scrubbers on a few of its large ships that permits it to use high sulphur fuel.

M Sheth, the doyen of Indian shipping, says the new rule “is possibly, the biggest and most controversial regulatory change to impact shipping industry”.

“The jury is still out on how this will play out, as it encompasses a host of issues like trade pattern changes, slow steaming, early scrapping, and, most importantly, unknown technical and operational challenges, but the general consensus is that it will have a positive impact on our markets over the short to medium term,” Sheth, who is the Chairman of the Great Eastern Shipping Company, said.

By not reducing the sulphur emissions limit for ships from 2020, air pollution would contribute to more than 570,000 additional premature deaths globally between 2020-2025, according to a study submitted to IMO's Marine Environment Protection Committee (MEPC).

“So, a reduction in the limit for sulphur in fuel oil used on board ships will have tangible health benefits, particularly for populations living close to ports and major shipping routes,” the IMO said.

Taking a cue from the IMO, India’s Directorate General of Shipping has issued guidance to stake holders for the smooth implementation of the new global sulphur cap rule.

Meanwhile, Indian state-run ports such as Chennai Port Trust, Cochin Port Trust, V O Chidambaranar Port Trust, Mumbai Port Trust, New Mangalore Port Trust and Mormugao Port Trust have won rate hikes in vessel and cargo related charges, some by as much as 25 per cent, from the tariff regulator.

The rate increases have been implemented to fund the rising operating costs and not to recover any capital investment for improving the ports’ basic infrastructure.

While state-owned ports are allowed to claim a 16 per cent return on capital employed (ROCE), many say they are making a return in the range of 6 to 8 per cent, to justify the hikes.

Port users have opposed the rate increases.

With the depleting ocean freight levels, shipping lines are in no position to accept the increase in port tariffs. Increase in vessel and cargo related charges would directly result in an upward movement of the shipping cost to the trade and thereby increase India's cost of logistics even further, which, the country is actually looking at reducing, according to the Container Shipping Lines Association (CSLA).

“Since the exporters and importers are working on very thin margins, a steep increase will prompt the users to shift to more competitive ports,” says a trade source.

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