2020 PREVIEW: Minerals markets eye impact of new freight regulation on shipping costs

By Michael Greenfield, Michael Greenfield, William Clarke, Jon Stibbs
Published: Thursday, 19 December 2019

The new International Maritime Organization (IMO) legislation scheduled to be implemented on January 1 has already affected freight costs, with some ship owners having to bear part of the financial burden.

Industrial mineral markets are gearing up for a major shift in logistics because new regulations on sulfur emissions will restrict vessel availability and supplies of suitable fuel. 

Freight costs are a major driver of prices of metals and minerals, particularly bulkier materials such as barite, soda ash, graphite and iron ore, where freight constitutes a bigger portion of the total per-tonne value. 

But market sources tell Fastmarkets that these disruptions are being balanced by an easing in freight prices due to other factors, including vessel availability.

New rules from the IMO will come into force at the start of 2020 that will limit the amount of sulfur oxide ships can produce in their emissions. 

Sulfur emissions are already controlled within designated emissions control areas, but the new regulations will affect ships even in international waters for the whole period of transit. 

Ships will either be required to burn fuel with a sulfur content of below 0.5% or be fitted with "scrubbers" that clean sulfur from the exhaust before it is released into the atmosphere. 

These scrubbers can either be integral to the vessel or be retrofitted to existing vessels. The cost of fitting scrubbers is likely to add up to several million dollars for most vessels, market sources say. 

For larger ships, fitting scrubbers is still likely to be cheaper than burning expensive low-sulfur oil throughout a ship’s lifetime, especially since the new regulations are expected to push up demand - and prices - for the higher-grade fuel. 

And anecdotal evidence suggests large ships are taking this option. In November 2019, Morgan Stanley said "in the shipping conference calls, companies continued to report delays in scrubber installations as ship yards get busier". 

A month earlier in October Emanuele Lauro, chairman of tanker shipping company Scorpio Tankers, told investors that freight prices had already risen because vessels were dry-docked to fit scrubbers. 

"These front haul voyages and a significant number of larger dry cargo vessels fitting scrubbers in Asia constrained the supply side and pushed rates to recent highs," Lauro said. 

But the smaller handysize vessels - of below 40,000 tonnes - consume less fuel, making fitting scrubbers less economical. This is particularly true of older ships, which have fewer years’ work in them before being scrapped. 

Most industrial mineral bulk shipments, such as alumina, graphite, and soda ash, are carried in handysize vessels. 

These ship owners have "overwhelmingly decided to pay the premium for low-sulfur fuel," according to one shipping broker that said only 8% of cargo ships had been retrofitted with scrubbers ahead of the new regulations coming into force at the start of 2020. 

It is unclear whether this figure included ships that had scrubbers on order and were had yet to be fitted. 

Fuel woes
Ship owners who have not fitted their vessels with scrubbers will have to pay the premium that the low-sulfur fuel currently commands. 

The 0.5% fuel may cost close to twice the price of 3.5% sulfur-content fuel which most ships had used before this legislation, one shipping fuel broker told Fastmarkets.

The price for the commonly consumed marine fuel with 3.5% sulfur, Intermediate Fuel Oil (IFO) 380, in Singapore is $344.50 per tonne. This compares with $613 per tonne for low-sulfur marine fuel, Very Low Sulfur Fuel Oil (VLSFO), also in the Singapore bunker.

Both prices were taken from news and intelligence website for the marine fuels industry Ship & Bunker and relate to trading taking place on December 13, 2019. 

Between July 4, 2019, when Ship & Bunker started publishing the marine fuel prices, and December 13, VLSFO in Singapore has traded between $520 and $613 per tonne. Comparatively, IFO 380 in Singapore has traded between $293 and $593.50 per tonne over the same period.

Low freight costs over the last decade have opened up long distance trade routes and should logistics costs see a significant rise it could shut off long distance routes for high-volume and low value commodities. 

There are also concerns that oil refiners may not have responded to the impending IMO regulation by producing more 0.5% sulfur fuel to cover the boom in demand from the start of this year.

"Rotterdam and Singapore will have enough fuel but if it is a small shipping destination then they may not have enough. I find it hard to believe that every port in the world will have enough of the low sulfur fuel," the shipping broker said. 

"The increase in costs is massive but not being able to find the fuel would be much worse," he added. 

Freight costs to rise
A shipper told Fastmarkets that vessels are in the process of transitioning to low sulfur fuel. 

"Ships will be running at full in the first two weeks of December to burn off their old bunker fuel," he said. "By December 15, ships start running on fuel under the new regulations."   

And prices are already increasing due to the new regulations, he added. 

"Because the freight rates have been falling, they have absorbed the influence of the increase in [fuel] costs so they have been hidden," he said. 

"[But] the [freight] market has now stabilized." 

The Baltic Dry Index, which is used to asses global freight prices, stands at 1,315 as of December 17, down from over 2,500 in September when freight prices hit a multi-year high driven in part by vessel shortage caused by other regulations, including IMO restrictions on the use of unfiltered ballast water. 

A logistics specialist at a commodity trader believes most of the freight price increase has already been priced in and there would be no jump in prices at the start of 2020. 

"I expect a firmer end to the year but no strong recovery," he said. "This will not be enough impetus to bulk freight rates off the bottom." 

Market participants reported freight rates between South Africa and China in December at $26 a tonne. 

"Shipping companies are already implementing higher prices - we have seen an additional $5 or $6 [per tonne] in place," a graphite market participant said.

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