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.

It’s challenging to get ahead, but it’s even harder to stay ahead.

For companies looking to create a sustainable competitive advantage in a fast-moving, capital intensive, and nascent sector like manufacturing electric vehicles, this is a simple reality that must be accounted for.

Every milestone achieved is met with the onset of new and more sophisticated competitors – and as the industry grows, the stakes grow higher and the market gets further de-risked. Then, the real 800-lb gorillas start to climb their way in, making competition even more fierce.

Visualizing U.S. EV Sales

Today’s animation uses data from InsideEVs to show almost nine years of U.S. sales in the electric vehicle market, sorted by model of car.

It paints a picture of a rapidly evolving market with many new competitors sweeping in to try and claim a stake. You can see the leads of early successes eroded away, the increasing value of scale, and consumer preferences, all rolled into one nifty animation.

The Tesla Roadster starts with a very early lead, but is soon replaced by the Nissan Leaf and Chevrolet Volt, which are the most sold models in the U.S. from 2011-2016.

Closer to the end, the Tesla Model S rises fast to eventually surpass the Leaf by the end of 2017. Finally, the scale of the rollout of the Tesla Model 3 is put into real perspective, as it quickly jumps past all other models in the span of roughly one year.

The Gorilla Search

While Tesla’s rise has been well-documented, it’s also unclear how long the company can maintain an EV leadership position in the North American market.

As carmakers double-down on EVs as their future foundations, many well-capitalized competitors are entering the fray with serious and ambitious plans to make a dent in the market.

In the previous animation, you can already see there are multiple models from BMW, Volkswagen, Honda, Fiat, Ford, Toyota, Nissan, and Chevrolet that have accumulated over 10,000 sales – and as these manufacturers continue to pour capital in the sector, they are likely posturing to try and find how to create the next mass market EV.

Of these, Volkswagen seems to be the most bullish on a global transition to EVs, and the company is expecting to have 50 fully electric models by 2025 while investing $40 billion into new EV technologies (such as batteries) along the way.

The Chinese Bigfoot?

However, the 800-lb gorilla could come from the other side of the Pacific as well.

Source: The Driven

Chinese company BYD – which is backed by Warren Buffett – is currently the largest EV manufacturer in the world, selling 250,000 EVs in 2018.

The Chinese carmaker quietly manufacturers buses in the U.S. already, and it has also announced future plans to sell its cars in the U.S. as well.

How will such an animation of cumulative U.S. EV sales look in the future? In such a rapidly evolving space, it seems it could go any which way.