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January 6 2020

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34 The Journal of Commerce | Januar y 6 2020 www.joc.com Maritime | In Perspective 2020 ANNUAL REVIEW & OUTLOOK PREPARATIONS AHEAD OF the IMO 2020 man- date attracted considerable attention within the industry during 2019. Many beneficial cargo owners (BCOs) didn't even know about the low-sulfur fuel rule until carriers announced their new bunker adjustment factor (BAF) structure at the end of 2018. Given that the coming regulations had been public for several years, it's clear that no material action was taken until the last possible moment. What's more, many important aspects of the mandate have been left by the wayside in the rush to meet the Jan. 1, 2020, deadline, including the impact of scrubbers, who will end up paying the bill, and the preparedness of other actors in relation to enforcement. Scrubber 'arms race' Carriers are vigorously pursuing the instal- lation of exhaust cleaning scrubbers in order to comply with IMO 2020 while continuing to burn lower-priced high-sulfur fuel. With a price differential between traditional and low-sulfur fuel of $200 to $250 per ton, the payback time for scrubber installation is roughly 12 to 18 months. A continuation of this spread would ensure continued scrubber installations in the next couple of years. By 2021, a substantial portion of the vessels operating in the Asia-Europe trade will be equipped with scrubbers, and many of those will be getting to the point where the capital costs have been covered. As a result, for contract negotiations in 2021 and even more so in 2022, we should expect a severe reduction in the asso- ciated BAF levels on this particular trade. That doesn't mean they will drop to zero — scrubbers still increase overall fuel consumption 1 to 3 per- cent and have costs associated with maintenance — but it is clear that the price competition in Asia-Europe in 2021–2022 will be dominated by carriers that have recouped their capital expendi- tures for scrubbers. This also implies that the usual "arms race rules" apply. As soon as a critical mass of vessels is getting scrubbers installed in a trade lane, everyone else has to follow suit or risk losing in the predictable competition on costs that will ensue one to two years later. Footing the bill That brings us to the aspect of who will pay the additional costs associated with scrubbers and compliant low-sulfur fuel. IMO 2020 will result in added costs of $10 to $15 billion annually versus a theoretical baseline of no new rules — with the operational cost aspect declining somewhat in a couple of years due to the aforementioned scrubber effect. The car- riers can't absorb such costs, meaning this has to be passed on to the BCOs, as increased rates/ surcharges or, in the case of generally declining oil prices, as less of a rate decline than would otherwise have been the case. Conversely, several large shippers have stated that IMO 2020 will not, as such, result in increased prices toward the consumers. And given that ocean freight costs are typically a tiny fraction of the consumer retail prices, such Lasting impact Effects of IMO 2020 to linger far beyond next year By Lars Jensen "If the air cargo business could organize itself to deliver a product the same day it arrived on the ground, it's a winner."

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