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IMO 2020 and Oil Prices in Shipping

IMO 2020 is a regulation set by the International Maritime Organization that states that as of January 1, 2020, the sulfur emissions of all maritime vessels must be limited to 0.5% m/m (mass by mass), down from the current 3.5% m/m.

Oil is the major source of feeding the global economy, supplying 95% of all the energy used in world transport. Maritime transport, which carries over 80% of the volume of global merchandise trade, relies heavily on oil for propulsion, and in view of the limitations imposed by existing technology and costs, there is not yet an alternate technology to replace oil.

For container trade, the effect of oil prices on container freight rates is estimated to be larger in periods of sharply rising and more volatile oil prices, compared to periods of low and stable oil prices.

Starting January 2020, the United Nations shipping agency the International Maritime Organization (IMO) bans ships from using fuels with a sulphur content above 0.5%, compared with 3.5% now. By the law, regulations are aimed at improving human health by reducing air pollution.

So what does IMO 2020 mean for shippers? How will IMO 2020 affect shippers, shipping costs and end consumers?

IMO 2020’s changes to the bunker fuel market can potentially affect fuel oil markets overall. As a result, all regions will experience higher refinery utilization, pushing markets to simpler marginal configurations and higher margins in 2020.

Shippers don’t need to make any drastic changes to their process, but they do have to be aware of the price volatility will definitely take place in 2020. When the price of ship fuel goes up by 50%, this could increase the cost of port-to-port sea freight costs by 10-20%.

The short story is that price increases will be passed onto shippers, which will ultimately be passed on to end consumers. As shippers are aware, any past cost increases along the supply chain has been inevitably passed to the shippers, which increases the landed cost of goods.

The port-to-port sea freight costs will increase and will be passed on to the party that is paying for the sea freight.

The party that ultimately pays for the sea freight depends on the IncoTerms that goods are sold. For example:

  • If exporters ship on CIF/CFR terms, they are already covering the costs of sea freight, so the exporter’s costs will increase.
  • If the exporter is selling on FOB terms, the importer is paying for the costs of sea freight, so the importer’s costs will increase.

In both cases, this will inevitably increase the landed cost of products. Importers and exporters must take note and closely monitor the increases in order to understand the actual cost of their products, and sell pricing. Importers and exporters will then be faced with the decision of how much of the increased costs they are willing to absorb, and how much will be passed on to customers and end consumers in the market.

The increased costs of fuel could also increase vessel transit times. Shipping lines may increase the practice of “slow steaming”, where ships sail at slower speeds to conserve fuel. This will further restrict capacity and also increase transit times.


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