IMO 2020 Defined:
Effective January 1, 2020, ships will be required to reduce overall sulfur emissions by over 80%. Carriers will meet this requirement either by transitioning vessels to a "low sulfur" content fuel or by continuing with current "heavy sulfur" content fuel and installation of exhaust gas cleaning systems (EGCS) commonly referred to as "scrubbers".
What will be the impact of freight rates and operations?
As carriers will not be able to solely absorb the costs of scrubber installation or the higher rate of low sulfur fuel, a Low Sulfur Surcharges (LSS) will be implemented effective December 1, 2019. At this time, the LSS will apply only to short-term validity, spot and FAK rates. The current LSS would be valid only for December 2019, with an adjusted LSS to be made effective January 1, 2020. It has yet to have been confirmed if the LSS will be managed quarterly or monthly moving forward, however it is expected the LSS will be blended into freight rates for an "all-in" tariff in January for all short-term validity, spot or FAK rates.
Longer-term rate agreements (12-month, fixed rates or named-account rates) would be exempt from the December LSS charge as long-terms rates are subject to quarterly BAF adjustment. It is expected the January 1 BAF will increase to reflect the cost of the low sulfur fuel.
Drewry expects the average price premium of low sulfur fuel over heavy sulfur fuel to be around $240/mt in 2020, gradually declining to close to $80/mt by 2023 once the supply of low sulfur fuel improves. Platts Analytics expects the price premium to reach the peak of a little over $350/mt in early the year, but then will ease back as supply and initial challenges are resolved. The anticipated effect of low sulfur supply stabilizing will be decreased low sulfur surcharges as the year progresses.