Shippers of refrigerated cargo should prepare for higher freight rates, as the implementation of IMO 2020 sulphur fuel cap is likely to increase shipping costs due to bunker surcharges.
Cold chain costs are also on the rise due to an increase in demand for reefer boxes, while production of the units are lagging behind.
The looming environmental regulation is set to impact the entire shipping industry, as the sulphur content in bunker fuel is limited to just 0.5% from 1 January – a steep reduction from the current 3.5% cap.
Current estimates suggest this will cost the container shipping industry an extra US$12 billion in added fuel costs per year since carriers will be forced to use low-sulphur fuel oil (LSFO) or retrofit ships with exhaust gas cleaning systems known as scrubbers.
Considering the annual cost is more than what the industry accumulatively made in the past eight years, most analysts agree carriers will be successful in passing on the fuel bill to their customers as the alternative would mean potential bankruptcies.
However, there remains some debate over exactly how and when the charges will be passed on. Some shippers are claiming carriers’ bunker adjustment factors (BAFs) are unclear or, in some cases, unpublished. Furthermore, shippers say there is little clarity over headhaul versus backhaul, or 20-foot versus 40-foot containers, for example, and disagreements remain over how the surcharges will be distributed.
The situation is similar for dry boxes and reefer containers. For example, CMA CGM has said it will implement a specific Reefer Consumption Surcharge of 20% on top of its BAF, and other carriers are expected to introduce similar increases given the extra electricity consumption required for refrigeration.
While IMO 2020 is likely to push up freight rates via fuel surcharges, it could also accelerate the obsolescence of conventional reefer ships, thereby driving up demand for reefer boxes and services.
According to shipping consultant Dynamar, while the share held by conventional reefer ships has been steadily declining for several years, conventional vessels still carry around 18% of the 116 million tonnes of global seaborne refrigerated cargo.
“Fuel costs make up a larger part of the costs for conventional reefer operators,” explained Dynamar’s general manager Matthieu Neering.
“Scrubbers or liquefied natural gas (LNG) are not an option for elderly ships because the costs are just too great. Some ship operators struggling to stay afloat may decide to scrap some of their oldest ships, or even exit the industry altogether.”
Neering said he expects many old and fuel-hungry conventional reefer ships will be scrapped, although he cautioned the specific market situation and the vessel condition are still “the most important motivations to scrap.”
Anne-Sophie Zerlang Karlsen, Head of Global Reefer Management at Maersk Line, contends this scrapping will accelerate containerisation and drive up demand for reefer boxes and services.
Speaking at the Cool Logistics Global conference, she noted how the global reefer fleet is already under pressure, with supply growing by 2.8% compared with 5-6% annual growth in refrigerated cargo. The impact from IMO 2020 could see the growth of reefer box demand jumping from 6% in 2018 to 12% in 2020, and 15% in 2021, she estimated.
However, given carriers are already facing higher fuel bills and associated costs from IMO 2020 – such as investing in scrubbers – some industry insiders are questioning their ability to continue investing in expensive reefer equipment to meet demand.
“If they can’t buy new reefer equipment themselves, they will charter them,” Neering reckons.