Shippers’ Guide to IMO 2020

For nearly a decade the maritime industry has anticipated this drastic change in allowable emissions associated with marine transport. Most stakeholders, however, are not adequately prepared to navigate this change.

In this guide, we explain how the ramifications of the IMO 2020 sulfur regulations will influence shippers moving international freight. We discuss challenges in calculating fuel reimbursements amid this transition, and shed light on how shippers can take control of their marine spend bringing accuracy and transparency to their strategy.

IMO 2020 SUMMARY: AN OVERVIEW OF THE REGULATORY CHANGE

On January 1, 2020 the International Maritime Organization (IMO) officially limited the allowable sulfur content of marine fuel to 0.5% S m/m. This regulation, commonly referred to as “IMO 2020” in the marine industry, is meant to limit emissions associated with global marine transport, and will instigate rippling affects to refining operations and prices of refined products, including diesel.

The significance of IMO 2020 has left the maritime industry in what feels like a scramble to adapt, despite more than a decade of lead up to the change. Because it is mandating that marine operators decrease their sulfur content by over 85 percent of previous legal levels it is imperative for transportation professionals from all corners of the industry to pay attention to its implications.

MARINE COMPLIANCE OPTIONS

Fortunately, as January approaches, we have a much clearer picture of which compliance measures are being taken by marine carriers to meet these new requirements. Enforcement of the regulation has been unclear throughout much of 2019’s anticipation, but four key means of carrier compliance should be noted: consume low-sulfur fuel oil, install scrubbers, switch to an alternative fuel like LNG, or ignore the regulations, bearing the brunt of non-compliance. It is important for shippers to pay attention to the means in which their marine carriers choose to navigate the regulations, because each option will directly affect reimbursement costs for marine fuel.

Though largely undefined, the Marine Environmental Protection Committee met last spring, and anticipated that compliance across the industry will be high.

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Though largely undefined, the
Marine Environmental Protection
Committee met last spring, and
anticipated that compliance
across the industry will be high.

IMPACTS TO REFINED PRODUCTS

Though specific to marine transport, the IMO 2020 sulfur regulation caught the attention of many professionals across modes of freight transportation. Although this change directly impacts marine fuel oil specifications, it will have implications for other low sulfur transport fuels that compete for the same portion of the refined barrel.

Read more about the breakdown of refined products on our blog, “What’s in Your Barrel“, and the factors that influence prices for refined products like marine fuel and diesel.

With the imminent fuel transition, shippers and carriers alike are tasked with navigating this evolving landscape, and all of the challenges and future opportunities that accompany it.

Additionally, refiners must consider how their operations will influence price behavior moving into 2020. Adapting the energy market to accommodate newly allocated demand on low sulfur fuels will be crucial to muting the affects of the transition. Throughout 2019, headlines regarding the affects to hit on January 1 ranged greatly – some expecting massive price spikes, while others anticipating more sedate price movements. In Q4, however, crude oil and diesel price movements were less than some outlets predicted.

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OVER THE ROAD TRUCKING IMPACTS

In reality, low-sulfur
fuel cracks, or diesel
premiums, will likely
increase above their
historical trends, but it
is also likely the diesel
price ceiling will remain
lower than 2018’s highs

The direct fuel price effects from IMO 2020 on the maritime market are well-researched. What is less directly clear, is how the IMO 2020 sulfur regulation will influence trucking diesel prices – which affect the movement of 10.5 billion tons of freight in the U.S. annually that uses 39 billion gallons of diesel fuel according to the American Trucking Association.

To unpack this relationship, it is important to understand the nature of fuel prices, and the price composition of a gallon of diesel at the pump. Paired with other aspects of marine fuel price volatility shippers can start to understand the dynamic nature of marine fuel prices, and develop the right strategy to navigate them.

Even with the right information, speculations early in 2019 proved to be difficult, as low-sulfur fuel prices wouldn’t be clear to BCOs until 2020.

As reported on the Breakthrough blog, our team understood and predicted the following: “In reality, low-sulfur fuel cracks, or diesel premiums, will likely increase above their historical trends, but it is also likely the diesel price ceiling will remain lower than 2018’s highs.”

Read more about our discussion of IMO 2020 Impact on Diesel Prices.

In response to volatility in low sulfur fuel prices,like that of diesel, commentary about how to curb the impacts of these fluctuations for your transportation budget took shape throughout 2019.

CURRENT CHALLENGES WITH MARINE FUEL MANAGEMENT PRACTICES

The IMO 2020 sulfur regulations are one of many marine fuel changes that shippers may encounter this year and in perpetuity as this international industry pushes toward cleaner emissions. It is, however, a prime example demonstrating the importance of accurate and transparent marine fuel management practices.

Historically, bunker adjustment factors (BAFs) have been the primary means of calculating reimbursements. But these mechanisms have proven to be ineffective at bringing consistency and accuracy to this cost input.

Many BCOs have begun to consider alternatives to historic BAF practices that largely include “all-in” price calculations.

This shift in how the shipping industry thinks about BAF practices is not new, and according to commentary at a 2019 TPM conference, is a notion that will endure in the future.

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SOLUTIONS

Breakthrough
Marine Fuel Recovery

The Importance of Visibility as IMO 2020 is enacted across the industry will remain apparent. Solutions that bring consistency, accuracy, transparency, and fairness to reimbursement practices are available, and have already begun to transform shippers’ marine strategies.

With the right champion, backed by data, research, and a firm understanding of changing industry trends, presenting a new marine fuel management program to your business can help it achieve a competitive advantage within its international supply chain. Read how best to approach the introduction of a disruptive idea to your leadership here.

Breakthrough is an industry leader in bringing accuracy and transparency to transportation and energy strategies, offering many of the world’s leading shippers a competitive advantage. Backed by an arsenal of data and a team of experts that monitor, forecast, and navigate changes in fuel and freight environments, Breakthrough’s Marine Fuel Recovery solution puts shippers back in control of their budget.

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CONCLUSION

The IMO 2020 sulfur regulation is one mandate, at one point in time. Its goal is to limit negative environmental effects associated with marine fuel. Based on the growing momentum for ever-more stringent sustainability regulations, all sectors of emissions-creating businesses can expect further “green” measures to follow. As IMO 2020 has demonstrated, making strategic choices now to prepare for a future of sustainable changes, is the best way to stay ahead of market evolutions and avoid substantial risks.

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Understanding how regulatory changes, like the IMO 2020 sulfur regulations, will impact your bottom-line shipping costs is the first step in taking control of your strategy.