More trans-Pacific trades next month will announce the low-sulfur fuel oil surcharges they intend to charge shippers in November and December as they phase compliant vessels into their fleets in order to meet the International Maritime Organization’s LSFO requirements taking effect Jan. 1.
The final two months of the year will likely be confusing for beneficial cargo owners (BCOs) because each carrier will have its own temporary surcharges for spot and contract shipments based on how much LSFO their vessels consume during the interim period. Carriers can either burn higher-cost LSFO or marine gasoil or install scrubbers to continue using lower-cost high-sulfur fuel oil (HSFO).
With the mandate nearing, cargo owners tell JOC.com they are increasingly under pressure to determine the scale of higher fuel surcharges they have to pay. A recent Drewry survey found that 16 percent of the respondents believe the cost impacts of the IMO 2020 regulation will be significant, and 6 percent say it will be extremely significant. Some 23 percent of the respondents were uncertain what the cost impact will be.
The bottom line is that carriers intend to be compensated for the higher fuel costs or investments in scrubbers they incur during the two months before permanent floating LSFO surcharges covering their entire fleet takes effect Jan. 1. The degree to which they can push interim surcharges will give a sense of their global prospects in pushing even higher surcharges next year.
Based on customer advisories issued by carriers that JOC.com has seen, BCOs can expect a variety of sucharge plans in the short term. Each carrier is calling its low-sulfur fuel surcharge by a different name. And they are speculating on the cost of a blended fuel that has virtually no market liquidity yet. In effect, carriers will be “partially charging” fees during this transition period.
BCOs have been equally diverse as to how they are approaching the IMO 2020 mandate which limits bunker fuel to 0.5 percent sulfur content, down from 3.5 percent today. Some BCOs have brought third-party experts with them to meetings with carriers, and they have provided detailed analyses as to what they believe the additional cost for low-sulfur fuel should be. Most BCOs have spoken with their carrier representatives and asked questions, but have yet to receive definitive answers as to what the final formulas will look like.
The Coalition for Responsible Transportation, an association that represents BCOs on matters involving regulations, environmental responsibility and freight transportation efficiency, has not sat in on those negotiations, but Stephen Cadden, executive director of the CRT, said the intentions of his members in the carrier discussions are clear.
“They want transparency. They want charges to be fair and equitable. They don’t want it to be a profit center for the carriers,” Cadden told JOC.com.
According to the Drewry survey, 56 percent of the respondents do not believe the current methods of fuel cost recovery are sufficiently fair and transparent.
Hapag-Lloyd advisory on interim surcharges
Hapag-Lloyd has been clear in its responses to inquiries from the JOC as to how it will handle the low-sulfur issue in the fourth quarter. In answers provided Friday by a company spokesman, Hapag-Lloyd said its vessels will start bunkering the LSFO in December in order to ensure full compliance by Jan. 1, 2020. In order to fulfill regulatory requirements from government agencies such as the Federal Maritime Commission and the European Union, Hapag-Lloyd will provide 30-day advance notice of its intended surcharges.
Actual surcharges for the new fuel, which Hapag-Lloyd will call Marine Fuel Recovery (MFR) charges, will begin in the fourth quarter. “Hapag-Lloyd will start charging customers partially for LSFO as of Q4 2019, which is in line with the cost exposure by preparing our vessels to be ready and fully compliant as of Jan. 1, 2020 (e.g. cleaning tanks, filling vessels with LSFO).”
In a Sept. 11 customer advisory, Maersk Line said it will introduce its Environmental Fuel Fee (EFF) “on all trades, which will apply to all spot business and contracts with validity up to three months.” The EFF will be trade-specific and will reflect fuel-related cost increases that result from compliance with the IMO regulation. The EFF will be “calculated as the price difference between high-sulfur fuel and low-sulfur fuel multiplied by a trade factor,” the customer advisory stated.
Maersk stated that the EFF tariffs will be applicable from Dec. 1 and will be announced at the end of October. As for fee adjustments due to price volatility, “The EFF tariffs will only be reviewed in case of significant fuel price fluctuations (more than $50/ton),” the advisory stated.
Calculating the cost of the new fuel for the short term is still a work in progress because it will involve the blending of different types of fuel, each of which is priced differently, according to an analysis by IHS Markit, the parent company of JOC.com. IHS estimates refiners will be able to supply half of the global low-sulfur marine fuel demand with new very low-sulfur fuel oil. The remaining demand for compliant fuel will be satisfied with marine gas oil, which is essentially diesel fuel. IHS Markit also expects roughly 2,000 ships will be using scrubbers as of Jan. 1, with another 600 to 700 ships actively being fitted for scrubber use.
Therefore, some carriers have presented customers with a matrix that projects surcharges based on cost ranges of the component fuels. Mediterranean Shipping Co. presented a chart on its proposed bunker recovery charge (BRC) broken down by TEU and FEU to the East Coast and West Coast. The low-sulfur surcharges range from $10 to $19 per TEU and $11 to $21 per FEU on top of base bunker charges of $200 to $360 per TEU to the West Coast and $400 to $720 per FEU to the East Coast. MSC stated in the advisory the bunker and low-sulfur surcharges will be effective Oct. 1-Dec. 31.
In a customer advisory earlier this month, Ocean Network Express (ONE) presented a chart with its new one bunker surcharge (OBS) effective Oct. 1 for contracts in effect since Jan. 1, 2019. The additional costs listed are $82 per TEU and $164 per FEU to the West Coast and $138 per TEU and $276 per FEU to the East Coast.
More clarity on LSFO expected as Jan. 1 approaches
As far as carriers are concerned, they know their global costs for fuel will begin to increase in November and December as they transition some vessels to LSFO, and retrofit other vessels with scrubbers so they can continue to burn today’s lower-cost high-sulfur fuel, and they intend to achieve some level of compensation during the interim period. Beginning Jan. 1, 2020, when all vessels are required to be compliant and LSFO prices are quoted at the major bunkering ports, more continuity in pricing will emerge, certainly on the major east-west trade lanes where the major bunkering ports are located.
In the meantime, some carriers have estimated the industry and carrier-specific costs based upon their projections on the spread between today’s high-sulfur costs and estimates of low-sulfur costs. Hapag-Lloyd provided this analysis for JOC.com:
“The utilization of the compliant low-sulfur fuel oil comes along with an increase in fuel costs, which experts estimate to initially amount to $60 billion annually for the entire shipping industry. On the assumption that the spread between high-sulfur fuel oil and low-sulfur fuel oil will be $250 per tonne by 2020, Hapag-Lloyd estimates its additional costs being around $1 billion in the first years.”
IHS Markit forecasts the Q1 spread between VLFSO and HSFO will be $350 to $400 per metric ton, double what it was at mid-year.
Contact Bill Mongelluzzo at firstname.lastname@example.org and follow him on Twitter: @billmongelluzzo