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Atlantic carriers face tough looming IMO fuel regulations

Federal Kivalina enters St. Lawrence Seaway as part of regular Fednav FALLine service between northern Europe and the Great Lakes. Photo: Gilles Savoie

In the boardrooms of carriers shipping containers or bulk products across the Atlantic and between North European ports, anxiety is rising over looming costly regulations that will not immediately apply to any other trade lanes – adding further pressures on bottom lines and provoking potentially increased freight rates for shippers.

As of January, ships sailing on Canadian, US and European routes will be compelled to burn much cleaner and more expensive fuel under new environmental regulations by the International Maritime Organization (IMO), the UN agency based in London. They are not scheduled to apply to other global shipping routes, including Asia, until 2020 at the earliest.

North America and northern Europe fall within so-called Emission Controlled Areas [ECAs] where ships will be required to burn fuels with a maximum sulphur content of 0.1 percent. This compares to 1 percent at present and an average three percent worldwide.

Drewry Maritime Research in the United Kingdom suggests that switching from heavy bunker fuel to marine gas oil would offer the most practical solution to meeting the new sulphur limits in the short to medium term. Otherwise, installing exhaust “scrubbers” is prohibitively expensive while using liquefied natural gas will require very large fuel tanks that will reduce cargo space.

Certainly, the matter is high up on the radar screen at the Montreal headquarters of Canada’s biggest international dry bulk shipping enterprise that transports about 25 million tonnes of bulk and breakbulk annually.

Paul Gourdeau, executive vice-president of Fednav International Ltd., said in an interview: “The ECA requirement will have a significant cost impact, especially for the St. Lawrence and Great Lakes ports competitiveness since the length of the voyages within the ECA to reach these ports is significantly greater than competing East Coast ports.

“Since most ships will not be fitted with scrubbers or other SOX reduction technologies, they will be required to burn low sulphur gas oil instead of intermediate fuel oil when proceeding in the ECA.”

Gourdeau estimates that the extra cost per tonne of fuel will likely be in the US$300 to US$400 range. “This will result in a significant fuel cost increase on those trade lanes.”

“Furthermore,” Gourdeau continued, “many ships have very limited diesel or gas oil storage capacity onboard and may often have to make intermediate port calls for the purpose of resupplying – which will also add cost and time to voyages.”

Deep-sea ocean carriers and short-sea European lines see no alternative but to pass on the extra costs to shippers.

A leading player in the Canada-Europe trade, Hapag-Lloyd estimates its transatlantic fuel bill will climb by US$120 million to US$200 million a year based on current fuel prices and its service network.

Maersk Line, its Safmarine unit between Europe and Africa, and Seago, its intra-Europe line, face a $200 million increase.

Hapag-Lloyd has stated bluntly that shippers will foot the bill.

“For all freight rates with validity in 2015, customers will have to amend their bunker formulas to cover the increasing costs for low sulphur fuel oil,” Hapag-Lloyd said in a recent statement. “Otherwise, Hapag-Lloyd reserves the right to charge an increased LSF [low sulphur fuel] surcharge separately once all cost components are confirmed.”

Shippers are already facing stiffer bills after the German carrier, citing continuing “dismal” financial results, announced general rate hikes for all transatlantic cargoes effective July 1.

Drewry affirms that the introduction of marine oil will add around $29 to the cost of transporting a standard 20-foot container between the East Coast of North America and $49 for voyages from the US Gulf coast. The news is worse for small and older vessels than the current most modern fleets.

Niels Smedegaard, ceo of DFDS, a Danish short-sea shipping and logistics group, has warned of bankruptcies and route closures as the transport market slowly bounces back from the impact of the eurozone economic downturn. DFDS even plans to levy a low sulphur surcharge on shippers – a move that could drive some shippers to transfer their cargoes to trucks, further congesting Europe’s crowded highways.

Nevertheless, key players on the English Channel, North Sea and Baltic routes are investing heavily to comply with the new regulations. For one, DFDS has allocated US$140 million to equip 20 ships with scrubbers to remove sulphur from exhaust gas. However, it has warned that up to seven of its Baltic routes are still at risk of being closed.

As the marine industry prepares for the new “green” regime across the Atlantic, some observers are wondering whether the planned relatively low level of fines will not make it appealing for some carriers to resort to non-compliance.

For example, SeaIntel, an industry analyst, has calculated that a 4,500-TEU containership sailing at 16 knots from the entrance of the English Channel to Hamburg using 1% sulphur fuel, instead of 0.1% sulphur content, will save 12,000 euros (US$ 16,500) on this leg alone. That would be six times more than a German fine.

Meanwhile, not just ocean cargo shipping lines are weighing the overall costs of the upcoming new fuel regime. So are global cruise operators confronted with difficult decisions for the future. In this connection, one company running vessels in all the existing ECAs has calculated that the price of compliance could soar by up to US$275 million a year – compared with a current outlay of US$195 million.

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