2020 is the 1066 of the shipping world; a date that is etched into our minds accompanied with a vague understanding of its importance. With Armageddon day around a year and a half away, the regulations that will have a dramatic effect on the shipping industry are clear, but how to deal with them and their lasting effects are about as certain as who will win the World Cup.
This article is part of a light-hearted series by Freight Investor Services (FIS) that will look at what the upcoming regulation means, possible solutions, the reactions of the industry players, culminating in an exploration of the hedging options available.
The 2020 journey began a long time ago in a world far, far away (well, 2016) when the IMO agreed the 0.5% sulphur cap on shipping fuel, cutting the permitted limit by
86 percent. It's true that fuel oils have averaged out lower than the 3.5 percent standard, with levels coming out around
2.6 percent, however this still remains a major shift across the industry.
One thing that the IMO has been very clear about is that there is going to be no delay in the introduction of the regulations. There was a point in the legislative process where it could have been delayed, but that has come and gone, there will be no political fudge here. If you do not comply, expect a stern letter, a fine, and being hauled in front of the IMO, looking very sheepish, with your parents at your side (though whether the risk of these is enough to deter non-compliance is questionable).
Compliance looks set to be high with
65 out of the 153 coastal states currently signed up, with
30 of them already operating sulphur zone restriction zones. It's true that there are non-signatories, as well as difficulties in terms of enforcing compliance, but with the majority of the world's major flag and port states having agreed to the new regulations, the likelihood of compliance (at least in the IMO's opinion) will be good. What is more likely to force nation compliance is the economic advantages from fines, cleaner air and seas, as well as higher premiums for refineries from selling 0.5 percent fuel oil.
For the port and coastal states there is significant political and public pressure to demonstrate they are stopping cowboy shipowner/operators pumping sulphur into their air and sea, and respectable owners do not want to be blacklisted by charterers or end up in the newspapers. These incentives should be enough for the IMO to report a good level of compliance, though the positive effects on global pollution will be harder to judge with accuracy.
But what about if there isn't the fuel, I hear you shout? Well, there will be a non-availability reporting system similar to that used by the U.S. Coast Guard, known as
FONAR, which will allow ships to report lack of compliant fuel which can be used as evidence if any cases are brought against them for using high-sulphur fuel oil. Phew. There will, of course, also be an exemption for those vessels fitted with scrubbers to make their ships compliant. Double phew.
Further to the main legislation banning the combustion of fuel oil over 0.5 percent sulphur, there will also be a ban on the carriage of the high-sulphur fuel oil - except as cargo or on a ship fitted with a scrubber. This is pending approval in October of this year but, like a Venezuelan election, we already know the outcome of the vote. This ban will come in slightly after the main D-Day at the beginning of 2020 and will begin in March, adding to the likelihood of regulation compliance.
So the shipping industry has two major changes to contend with come 2020: a sulphur cap of 0.5 percent on marine fuel oil and a carriage ban coming into force a few months later. Now that the specifics of the regulations have been covered, the next article in the series will look at the possible approaches to dealing with the impending changes.
