The global shipping industry is bracing for cost escalations arising from new fuel regulations that come into effect from January 1st. The new regulation, called International Maritime Organisation (IMO) 2020, will limit the sulphur content in fuels to 0.5%, down from 3.5%. There is a stricter limit of 0.1% sulphur content in effect in emission-controlled areas such as the Baltic Sea and the North Sea.
“This is likely to lead to higher operating costs and capex for shipping companies,” Fitch Ratings said in a 2020 outlook report for global shipping.
For instance, a leading global shipping company, AP Moeller-Maersk, estimates its bunker cost could increase by more than $2 billion. Plagued by overcapacity, which is limiting their bargaining power, shipping companies are unlikely to fully pass all the associated costs on to customers, Fitch Ratings believes. Shipping lines can achieve the new limits by using low-sulphur fuels or install abatement technology called scrubbers, a unit that uses water to wash exhaust gases from main and auxiliary engines and boilers. They may also use alternative fuels, such as LNG, methanol and others.
“Most companies will likely comply with the sulphur cap by using low-sulphur fuels, which are more expensive than high-sulphur fuels.” Scrubber technology and the use of alternative fuels require upfront capex either for scrubber installation or purchase of new LNG-fuelled vessels and developed LNG bunkering infrastructure. Global shipping firm CMA CGM plans to use LNG to power 20 vessels by 2022. Fitch Ratings says shipping lines will have to cope with the new regulations amidst a negative outlook for the year ahead.
Global economic growth is slowing down. On top of that shipping firms, having invested in capacity expansion, are fretting over trade tensions between China and the US.
“While the upside is possible if the trade tensions between the US and China ease, the downside risks, including expected slower GDP growth in China, soft trade growth and Brexit uncertainty, continue to weigh on demand,” Fitch notes. It expects global container volumes will grow 2.5% in 2020, below the annual average growth of 4.5% over the past eight years.
“Trade restrictions, if they remain unresolved, are likely to have a negative impact on global container volumes of about 1% in 2020, according to AP Moller-Maersk,” Fitch Ratings says. Fleet capacity will expand by 3.3%, marginally lower than the estimated 3.6% growth rate for 2019. Freight rates are likely to remain unchanged. Global dry bulk volumes will grow by 3% in 2020 on higher iron ore and commodities volumes.
“Fleet additions are likely to match this growth in volumes, and freight rates are likely to increase as dry-bulk shippers will be better positioned to pass on some of the higher fuel costs,” Fitch notes.
The outlook for tankers is relatively stable with volume expected to grow by 3.5% while capacity expands 2.5%.
“The impact of IMO 2020 on tanker shipping companies is likely to be mixed, as rising compliance costs may be mitigated by increased tanker demand to transport compliant fuel,” Fitch says. “However, lingering trade and geopolitical tensions and political risk may depress long-term tanker demand.”