Andreoli on Oil and Fuel: Ocean carrier fuel costs are about to jump
Cost conscious shippers understand that fuel comprises between 40 percent and 60 percent of ocean carriers’ operating costs, and bunker surcharges are a similarly important line item on a shipper’s own income statement.
in the NewsState of Logistics 2016: Pursue mutual benefit Despite mixed Q2 results, transportation & logistics deal making prospects look bright Managing Global Transportation: How NVOCCs can operate more profitably STB rolls out proposed reciprocal switching regulations Climate Change Bringing More Rain Will Complicate Supply Chains More News
Cost conscious shippers understand that fuel comprises between 40 percent and 60 percent of ocean carriers’ operating costs, and bunker surcharges are a similarly important line item on a shipper’s own income statement. In order to control rapidly rising fuel costs, ocean carriers have invested in significantly larger vessels and now operate them at a fraction of the speeds considered “normal” a decade ago when oil prices were just $30 per barrel.
Despite significant efficiency gains, carriers will see their fuel expenditures jump in the early months of 2015 as a result of tightening sulfur emissions regulations. And as is the case today, rising fuel costs will be passed on to shippers.
The International Maritime Organization (IMO) regulates ship exhaust through Annex VI of The International Convention for the Prevention of Pollution from Ships (MARPOL Annex VI). Sulfur and nitrogen oxide emissions are regulated by capping the sulfur content of marine fuels that are allowed to be burned in the open ocean and in environmentally sensitive Emissions Control Areas (ECA) in which emissions limits are especially strict.
The North American ECA extends approximately 200 miles from the shoreline, and for our purposes here, the European ECA includes all waters east of the entrance to the English Channel. Over time, the permissible sulfur content is progressively reduced in ECA and in the open ocean as well. The next round of reductions affecting all ECA will come into force in January 2015 when carriers will be required to burn fuel with a sulfur content no higher than 1,000 parts per million (0.1 percent).
The current limit is 1 percent, and in order to meet the current requirement, carriers burn low sulfur intermediate or heavy fuel oil (IFO/HFO). These bunkers are created by blending higher sulfur IFO or HFO with lower sulfur IFO or marine gas oil (MGO). Currently, the price differential between low sulfur IFO/HFO and high sulfur HFO is $57 per metric ton in Rotterdam and $90 per metric ton in Singapore.
With HFO prices at $581 and $588 per metric ton in Rotterdam and Singapore, respectively, the current ECA “tax” amounts to 10 percent per metric ton of fuel burned in the European trades and 15 percent for Asian trades.
Come January, the most likely track that carriers will take to meet the new, lower sulfur requirement will be to burn MGO in the ECA. Over the longer term, exhaust scrubbers may be installed, or engines converted to run LNG.
Under today’s prices, the ECA tax associated with burning MGO in the European trades would be $405 per metric ton, and in the Asian trades it would be $366 per metric ton. Thus, if prices remain unchanged, the fuel burned in ECA will be between 162 percent and 170 percent more costly per ton than fuel burned in the open ocean.
Of course, the fuel burned in the ECA relative to fuel burned on the open ocean depends on which ports are called and the specifics of the route used. In order to put a concrete number on how we might expect carriers’ fuel costs to change as a consequence of the lower sulfur regulations coming into force in January, we modeled two liner services, the Atlantic Express (ATX), which serves the European trade, and the Super Shuttle Express (SSX), which serves the Asia trade.
Whereas only one of the six ports connected by the SSX service (LA/Long Beach) is located in an ECA, all seven of the ATX ports of call are located in an ECA. Moreover, the voyage across the open waters of the Pacific is approximately twice that of the Atlantic.
While both the ATX and SSX services, which are representative of the European and Asian trades more generally, will be negatively impacted by the impending sulfur limit reduction, the fuel costs for the ATX will be impacted to a far greater degree.
Operating in an ECA 35 percent of the time, fuel costs associated with operating the ATX will increase by 23 percent as a consequence of shifting from low sulfur HFO/IFO to MGO. By contrast, the vessels in the SSX spend only 8 percent of the time steaming in an ECA, and fuel costs will increase by 6 percent.
Whether through a general rate increase, an Annex VI fuel surcharge, a bunker adjustment factor increase, or through some other means, these higher fuel costs will be passed on to shippers, and that is something to keep in mind as supply chain decisions are made in the months to come.
About the AuthorDerik Andreoli Derik Andreoli, Ph.D.c. is the Senior Analyst at Mercator International, LLC. He welcomes any comments or questions, and can be contacted at [email protected]
Subscribe to Logistics Management Magazine!Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your entire logistics operation.
Start your FREE subscription today!
2016 State of Logistics: Third-party logistics 2016 State of Logistics: Ocean freight View More From this Issue