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IMO 2020: The Big Shipping Shake-Up

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IMO 2020 shipping Infographic

IMO 2020: The Big Shipping Shake-Up

Over 90% of all global trade takes place on our oceans.

Unfortunately, the network of 59,000 vessels powering international commerce runs on sulfur-laden bunker fuel, and resulting emissions are causing problems on dry land.

As today’s infographic by Breakwave Advisors demonstrates, new emissions regulations taking effect in 2020 will have a big impact on the world’s massive fleet of marine shipping vessels.

The Regulatory Impact

The International Maritime Organization (IMO) – the UN agency responsible for ensuring a clean, safe, and efficient global shipping industry – will be implementing new regulations that will have massive impact on maritime shipping.

The regulations, dubbed IMO 2020, will enforce a 0.5% sulfur emissions cap worldwide starting January 1, 2020 ─ a dramatic decrease from the current emissions cap of 3.5%.

Here are a few ways marine fuel will likely be affected by these regulations:

  • High-sulfur fuel oil will drop in price as the demand drops dramatically after January 1, 2020
  • Diesel, a low-sulfur fuel oil, will be in higher demand and should see a price increase
  • Refiners should also expect higher profits as refining runs increase to satisfy the new regulations

The Economic Impact

IMO 2020 will be one of the most dramatic fuel regulation changes ever implemented, with a significant impact on the global economy.

New regulations are certain to influence freight rates ─ the fees charged for delivering cargo from place to place. These rates can fluctuate depending on:

  • Time and distance between ports
  • Weight and density of the cargo
  • Freight classification
  • Mode of transport
  • Tariffs and taxes
  • Fuel costs

Rising fuel costs means rising freight rates, with much of these costs being passed to consumers.

In a full compliance scenario, we estimate the total impact to consumer wallets in 2020 could be around US$240 billion.

─ Goldman Sachs

The Environmental Impact

Not surprisingly, the world’s 59,000 transport ships, oil tankers, and cargo ships have a consequential impact on the environment.

Bunker fuel accounts for 7% of transportation oil consumption (~3.5 million barrels/day). Burning this fuel generates about 90% of all sulfur oxide and dioxide (SOx and SO2) emissions globally. In fact, the world’s 15 largest ships produce more SOx and SO2 emissions than every car combined.

These sulfur emissions can cause several harmful side effects on land ─ acid rain, smog, crop failures, and many respiratory illnesses such as lung cancer and asthma.

Changing Currents in the Shipping Sector

As IMO 2020’s implementation date nears, shippers have a few courses of action to become compliant and manage costs.

1) Switch to low-sulfur fuel

Bunker fuel use in the shipping industry was 3.5 million barrels per day in 2018, representing roughly 5% of global fuel demand.

Annual bunker fuel costs are predicted to rise by US$60 billion in 2020, a nearly 25% increase from 2019. Price increases this significant will directly impact freight rates ─ with no guarantee that fuel will always be available.

2) Slower Travel, Less Capacity

The costs of refining low-sulfur fuel will increase fuel prices. To offset this, shippers often travel at slower speeds.

For example, large ships might burn 280-300 metric tons of high-sulfur fuel oil (HSFO) a day at high speeds, but only 80-90 metric tons a day at slower speeds. Slower travel may cut costs and help reduce emissions, but it also decreases the capacity these vessels can transport due to longer travel times, which shrinks overall profit margins.

3) Refueling Detours

Adequate fuel supply will be a primary concern for shippers once IMO 2020 takes effect. Fuel shortages would cause inefficiencies and increase freight rates even more, as ships would be forced to detour to refuel more often.

4) Installing Scrubbers

A loophole of IMO 2020 is that emissions are regulated, not the actual sulfur content of fuel itself.

Rather than burning more expensive fuel, many shippers may decide to “capture” sulfur before it enters the environment by using scrubbers, devices that transfer sulfur emissions from exhaust to a disposal unit and discharges the emissions.

With IMO 2020 looming, only 1% of the global shipping fleet has been retrofitted with scrubbers. Forecasts for scrubber installations by mid-2020 run close to 5% of the current ships on the water.

There are a few reasons for such low numbers of installations. First, scrubbers are still somewhat unproven in maritime applications, so shippers are taking a “wait and see” approach. As well, even if a ship does qualify for a retrofit, cost savings won’t take effect until several years after installation. On the plus side, ships with scrubbers installed will still be able to use the existing, widely-available supply of bunker fuel.

Moving Forward

No matter which route shippers choose to take, the short-term impact is almost certainly going to mean higher freight rates for the marine shipping industry.

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Environment

As the Worlds Turn: Visualizing the Rotation of Planets

Rotation can have a big influence on a planet’s habitability. These animations show how each planet in the solar system moves to its own distinct rhythm.

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As the Worlds Turn: Visualizing the Rotations of Planets

The rotation of planets have a dramatic effect on their potential habitability.

Dr. James O’Donoghue, a planetary scientist at the Japanese space agency who has the creative ability to visually communicate space concepts like the speed of light and the vastness of the solar system, recently animated a video showing cross sections of different planets spinning at their own pace on one giant globe.

Cosmic Moves: The Rotation of the Planets

Each planet in the solar system moves to its own rhythm. The giant gas planets (Jupiter, Saturn, Uranus, and Neptune) spin more rapidly on their axes than the inner planets. The sun itself rotates slowly, only once a month.

PlanetRotation Periods (relative to stars)
Mercury58d 16h
Venus243d 26m
Earth23h 56m
Mars24h 36m
Jupiter9h 55m
Saturn10h 33m
Uranus17h 14m
Neptune16h

The planets all revolve around the sun in the same direction and in virtually the same plane. In addition, they all rotate in the same general direction, with the exceptions of Venus and Uranus.

In the following animation, their respective rotation speeds are compared directly:

The most visually striking result of planetary spin is on Jupiter, which has the fastest rotation in the solar system. Massive storms of frozen ammonia grains whip across the surface of the gas giant at speeds of 340 miles (550 km) per hour.

Interestingly, the patterns of each planet’s rotation can help in revealing whether they can support life or not.

Rotation and Habitability

As a fish in water is not aware it is wet, so it goes for humans and the atmosphere around us.

New research reveals that the rate at which a planet spins is an essential component for supporting life. Not only does rotation control the length of day and night, bit it influences atmospheric wind patterns and the formation of clouds.

The radiation the Earth receives from the Sun concentrates at the equator. The Sun heats the air in this region until it rises up through the atmosphere and moves towards the poles of the planet where it cools. This cool air falls through the atmosphere and flows back towards the equator.

This process is known as a Hadley cell, and atmospheres can have multiple cells:

Hadley Cells

A planet with a quick rotation forms Hadley cells at low latitudes into different bands that encircle the planet. Clouds become prominent at tropical regions, which reflect a proportion of the light back into space.

For a planet in a tighter orbit around its star, the radiation received from the star is much more extreme. This decreases the temperature difference between the equator and the poles, ultimately weakening Hadley cells. The result is fewer clouds in tropical regions available to protect the planet from intense heat, making the planet uninhabitable.

Slow Rotators: More Habitable

If a planet rotates slower, then the Hadley cells can expand to encircle the entire world. This is because the difference in temperature between the day and night side of the planet creates larger atmospheric circulation.

Slow rotation makes days and nights longer, such that half of the planet bathes in light from the sun for an extended period of time. Simultaneously, the night side of the planet is able to cool down.

This difference in temperature is large enough to cause the warm air from the day side to flow to the night side. This movement of air allows more clouds to form around a planet’s equator, protecting the surface from harmful space radiation, encouraging the possibility for the right conditions for life to form.

The Hunt for Habitable Planets

Measuring the rotation of planets is difficult with a telescope, so another good proxy would be to measure the level of heat emitted from a planet.

An infrared telescope can measure the heat emitted from a planet’s clouds that formed over its equator. An unusually low temperature at the hottest location on the planet could indicate that the planet is potentially a habitable slow rotator.

Of course, even if a planet’s rotation speed is just right, many other conditions come into play. The rotation of planets is just another piece in the puzzle in identifying the next Earth.

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Chart of the Week

Visualizing the Biggest Risks to the Global Economy in 2020

The Global Risk Report 2020 paints an unprecedented risk landscape for 2020—one dominated by climate change and other environmental concerns.

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Top Risks in 2020: Dominated by Environmental Factors

Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.

While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.

Front and Center

Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.

According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:

Top Global Risks (by "Likelihood") Top Global Risks (by "Impact")
#1Extreme weather#1Climate action failure
#2Climate action failure#2Weapons of mass destruction
#3Natural disasters#3Biodiversity loss
#4Biodiversity loss#4Extreme weather
#5Humanmade environmental disasters#5Water crises

With more emphasis being placed on environmental risks, how much do we need to worry?

According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.

While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.

The Stranded Assets Dilemma

If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.

Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.

The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.

– Institute for Energy Economics and Financial Analysis

The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:

  • Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
  • Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
  • New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.

A Tough Road Ahead

In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.

These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.

Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:

  • Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
  • Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
  • An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.

The Ball Is In Our Court

It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.

How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.

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