New IMO2020 Regulation looks certain to increase ocean freight rates
As of January 2020, a new regulation from the International Maritime Organization (IMO) bans ships from using fuels with a sulphur content above 0.5%, down from 3.5%. This will increase operating costs for ocean carriers.
With the IMO2020 regulations in effect many ocean carriers and charterers have invested in installing scrubbers, others have scrubber installations on the way, or are expected to retrofit scrubbers by 2021.
What remains unclear is how the container market will be impacted by these increased costs and how container vessel operators will pass them on.
The container shipping industry has gone through considerable consolidation, and as S&P Global Platts pointed out in their Shipping Special Report from May 2019: “Considering the small number of big players that handle such enormous volume of trade, one might assume that liners should be in a good position to recoup any extra bunker costs resulting from IMO 2020.”
To recover the cost for scrubber installations and extra fuel cost requires a fundamentally strong freight market. The upcoming annual contract negotiations will provide a good gauge of how the China - US trade conflict, the weaker outlook of global trade when compared to previous years, and other events influencing global economies will affect the freight market.
The increase in bunker cost and upfront expenses either for scrubber installation or purchase of new vessels will no doubt have to be offset through higher freight rates.
Looking ahead, users of containerized ocean freight services should expect increased freight rates due to coordinated action from the three carrier alliances looking to recover these additional costs.