The impending regulations by the International Maritime Organization (IMO) will result in higher freight costs, and ultimately, those costs will be passed to consumers, according to IHS Markit on Tuesday.
Beginning on Jan. 1, 2020, new regulations from IMO will lower the maximum sulfur content of marine fuel oil used in ocean-going vessels from 3.5 percent to 0.5 percent. The new report by IHS Markit, titled “Navigating Choppy Waters: Marine Bunker Fuel in a Low-Sulfur, Low-Carbon World,” showed that compliance with the regulation will lead to higher freight costs for most cargoes-including electronics, autos, petrochemicals and even cruise ship fares. According to the report, the refining and shipping industries are ill-prepared for the massive change in fuel regulation by IMO set to go into effect next year. The resulting market impacts will be major, costly and far-reaching.
The impending regulation by IMO, a sanctioning body for the world’s shipping fleet, aims to significantly reduce the amount of sulfur in bunker fuels that are relied on for commercial shipping. Collectively, these ships burn more than 3 million barrels a day of residual fuel oil, which has a sulfur content that exceeds levels found in automotive gasoline by more than 1,000 times. Burning fuels with a higher sulfur content leads to a greater level of toxic air emissions, including sulfur oxides, which are considered a threat to the environment and human health. First announced by IMO in 2008, the organization confirmed in 2016 that global refiners and shippers would have to comply with these new environmental regulations by 2020. Non-compliant vessels could suffer loss of charter to sail. Shippers have several options for compliance, including low-sulfur bunker fuels and liquefied natural gas (LNG). However, IHS Markit researchers expected that on-board ship scrubbers, devices that clear harmful pollutants from exhaust gas, will be the primary compliance path for larger ships which could continue to burn cheaper, higher-sulfur fuels.
Refiners will produce more distillates, higher-value components derived from crude, as new demand arises. Therefore, refiners will likely have to make significant operational changes and ultimately invest billions to shift their existing product slates, increasing costs and distillate prices. IHS Markit is a global company in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The U.S. Energy Information Administration (EIA) also expressed the similar concerns last month, saying that the new regulations for changes in marine fuel sulfur limits will put upward pressure on diesel margins and crude oil prices in late 2019 and early 2020.
The administration forecast that one of the most significant impacts from the regulations will be on diesel wholesale margins, which will increase from an average of 0.43 U.S. dollar per gallon (about 3.8 litters) in 2018 to 0.48 dollar per gallon in 2019 and then to 0.65 dollar per gallon in 2020. The EIA also expected that starting in the fourth quarter of 2019, the regulations will drive global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel. Total U.S. refinery runs are expected to increase by 4 percent from 2019 to reach a record level of 17.9 million barrels per day on average in 2020.