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IMO Low-Sulfur Fuel Mandate FAQ's

The International Maritime Organization (IMO) has mandated ocean carriers begin using low-sulfur fuels by January 1, 2020 and that date is fast approaching. We have discussed the impact of transitioning to low-sulfur fuel in previous newsletters. In short, the low-sulfur mandate came about as an effort to cut sulfur-oxide emissions in Emission Control Areas (ECA), a 200-mile buffer around the U.S. shoreline and other designated areas around the world. bigstock-Industrial-Cargo-Ship-Causing--229308892Ocean carriers can comply with the new mandate by retrofitting vessels with special fuel scrubbers, a costly and time-consuming process or burning the new, more costly low-sulfur fuel. As we approach the deadline, there are some things you need to know about how the low-sulfur mandate will soon impact your bottom line. 

What is the IMO Low Sulfur Fuel Mandate?

In short, the low-sulfur mandate came about as an effort to improve air quality by reducing sulfur-oxide emissions in Emission Control Areas (ECA), a 200-mile buffer around the U.S. shoreline and other designated areas around the world. The International Maritime Organization (IMO) announced regulations in 2016 which mandate ocean carriers begin using fuels with a sulfur content no higher than 0.5 percent by January 1, 2020. Ocean carriers can comply with the new mandate by retrofitting vessels with special fuel scrubbers, a costly and time-consuming process or burning the new, more costly 0.5 percent low-sulfur fuel.  Vessels who are caught burning fuel that doesn’t meet the new low-sulfur requirement face fines, cancellation of insurance and could even be declared unseaworthy.

What does LSS / LSF stand for and what is its’ purpose?

LSS stands for Low-Sulfur Fuel. Also known as Low Sulfur Surcharge, Low Sulfur Bunker Surcharge or Low Sulfur Fuel Surcharge (LSF) is a fee imposed by ocean carriers to offset the costs of complying with the IMO’s low-sulfur mandate. It is important to note the LSS / LSF is not a fixed amount, rather it will vary depending on ocean carrier and route.

Is the LSS / LSF fee in addition to the BAF that we pay now?

Yes. Carriers have imposed a low-sulfur surcharges fee in addition to the quarterly Bunker Adjusted Fuel for some time now. Some carriers include it in with their BAF fees and some show is as a separate item.

When did the International Maritime Organization (IMO) adopt these new regulations?

The date of 1 January 2020 was set in the regulations adopted in 2008. However, a provision was adopted, requiring IMO to review the availability of low sulfur fuel oil for use by ships, to help Member States determine whether the new lower global limit on sulfur emissions from international shipping shall come into effect on 1 January 2020 or be deferred until 1 January 2025. IMO’s Marine Environment Protection Committee (MEPC 70), in October 2016, decided that the 0.50% limit shall apply from 1 January 2020

Do low-sulfur charges only apply to shipments from Asia?

No, because the IMO Low-sulfur fuel regulation is an environmental impact mandate for all ocean vessels who enter Emission Control Areas. This means anywhere inside 200 miles from the United States coast and other designated ECA’s around the world, vessels must burn low-sulfur fuel.

Who will pay for the new low-sulfur fuel regulations?

First, ocean carriers, then beneficial cargo owners (shippers) and ultimately consumers. Industry experts have indicated the cost for ocean carriers to comply with the Low-Sulfur mandate could be $10-15 billion dollars. As with other cost increases carriers will have little choice but to pass these along in the form of increased BAF fees, low-sulfur fees and other increases.

How much will the BAF Increase? How much the typical LSS/LSF fee?

The potential BAF (or Low Sulfur Fuel) cost increases are estimated to be anywhere from $200 - $400 per TEU. Please note these are only estimates.

Some analyst have predicted bunker fuel (BAF) fees could increase as follows:

Asia-to-Europe 40% or $270 per 40' container 

Transpacific Eastbound 33% or $150 per 40' container

What can I do to reduce my BAF cost?

Unfortunately, BAF and any additional charges related to low-sulfur fuel are charges imposed by the carriers.  These fees cannot be avoided if you use ocean carriers. The fees also vary per carrier.

I have a ‘fixed rate’. How will the higher fees affect me?

You may have a “fixed” rate for the base ocean freight for a container. In the past, fixed rates have included the BAF and LSF fees.  This contract year more carriers anticipated larger swings in BAF and LSS / LSF fees and have separated the BAF and LSF/LSS fees from fixed rates. Your fixed rates will be for the base ocean freight. Because BAF or LSS fees are separate they might increase but your container rate remains fixed.

What are Carriers doing to prepare for the January 1 deadline?

Carriers have three options to ensure their fleets will be compliant with the low-sulfur regulations.

  • Install special scrubbers to their vessels which will allow them to burn less-costly higher-sulfur fuel and still be compliant while in emissions in Emission Control Areas (ECA).
  • Purchase and burn the new .05 low-sulfur fuel.
  • Opt to burn alternate liquefied natural gas fuel.

As carriers prepare to meet the January 1, 2020 deadline, vessels may be pulled from service to retrofit scrubbers or perform other maintenance required in order to burn low-sulfur fuel.

What other impact could there be from the new low-sulfur regulations?

Installing scrubbers and performing other required maintenance to prepare to burn low-sulfur fuel can take a vessel out of service for several weeks. This could result in carriers opting to blank sailings for some routes in the 4th quarter of 2019. Should this preparation result in a capacity constriction there is also a potential for shippers to see increases in spot rates in the 4th quarter of 2019.

The common theme in terms of low-sulfur fuel and its potential impact on your supply chain is to expect some increase in shipping costs. How much the BAF or Low Sulfur fuel factors will increase remains to be seen however shippers should prepare now.

Watch this space as we strive to keep you up-to-date on developments related to IMO low-sulfur fuel regulations. 

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