The International Maritime Organization (IMO) has developed several mandates to reduce marine pollution. Effective January 1, 2020, container vessels will only be allowed to use fuel with a maximum sulfur content of 0.5%. The current regulation allows for fuel with a sulfur cap of 3.5%. The cost of this new mandate is going to impact multiple stakeholders in the shipping industry. The ocean carriers are projecting that it will cost them between $10-$15 billion in added fuel costs. They have also been very upfront on how they plan to pay for the added fuel costs. The costs will be passed along to the stakeholders, including shippers, operating within the industry.
The effective date of the mandate is six months away and there are already concerns that there is not enough supply of low sulfur fuel to meet demand. The current price of the cleaner low sulfur fuel is $250 per ton more than the fuel with a sulfur cap of 3.5%. Demand for the fuel with a maximum sulfur content of 0.5%. is expected to spike in the fourth quarter 2019 as carriers prepare to meet the mandate. The spike could increase the cost of low sulfur fuel by another $100 per ton.
If you are involved with shipping ocean containers, you will be impacted by this new mandate. Shippers will be impacted from both a supply and cost standpoint. Carriers have indicated that sailings could be cancelled while the transition from burning the high sulfur fuel to the low sulfur fuel takes place. The timing could not be worse as the transition will take place during the peak shipping period. There are other factors, such as implementing additional tariffs, that could further impact how carriers decide to manage supply.
The amount of cost the carriers plan to pass along still remains to be determined. There has been much speculation in the industry on what the added costs will be to shippers. As we get closer to the effective date, analysts are estimating an overall increase in freight costs of 10%. The carriers are expected to announce their individual cost strategies by September 1, 2019.
The Asia to US trade lane has been unstable since Hanjin declared bankruptcy in 2016. Carrier consolidation, tariffs and now IMO 2020 have made for very choppy waters for shippers to navigate for the past three years. Shippers that are able to quickly adapt to the market environment will face far less disruptions to their supply chains. Shippers that refuse to accept that the balance of power has shifted in the carriers’ favor will continue to face instability in cost and service.
The International Housewares Shippers Association (IHSA) is a not-for-profit association formed to benefit companies belonging to the International Housewares Association (IHA). Through the combined leverage of members, IHSA negotiates freight contracts and partners with other logistics providers to lower supply chain costs.
IHSA’s main function is to negotiate the lowest possible transportation rates and provide the highest quality service for all participating members. Additionally, IHSA members receive valuable market intelligence and advice through regular newsletters and briefings.
IHA member companies looking to reduce their ocean freight costs or have questions about an ocean freight issue are encouraged to contact IHSA to learn about the program. Contact IHSA at +1-513-489-4743 and learn more on our website.