2018 has now drawn to a close and as we enter together 2019 the wider economy is starting to recognise the fundamental change that is coming on 1st Jan 2020. This is when the global shipping industry will move from a standard of 3.5% sulphur to a new type of fuel with maximum 0.5% sulphur, referred to as Very Low Sulphur Fuel Oil (VLSFO). STL Shipping and EUKOR welcomes the global sulphur cap as an important step in reducing the impact of global supply chains on people’s health and the environment.
EUKOR has been actively engaging with many customers for the past 18 months on ‘IMO Sulphur 2020’ to raise awareness of the implications of this change and ensure it is recognised in all contracts that run into 2020 and beyond.
Fundamental to this regulatory change is the principle that freight rates should reflect the true economic cost of shipping goods. Accordingly, the cost implications of IMO Sulphur 2020 must be relayed, in full, to cargo owners. The global ocean transport industry simply cannot absorb a financial burden of this magnitude.
Bunker fuel and commodity experts agree that IMO Sulphur 2020 will see prices of compliant VLSFO increase over current 3.5% fuels. Well-established Bunker Adjustment Factor (BAF) mechanisms are employed to accommodate such fluctuations in fuel prices, but the timing of the IMO sulphur 2020 price effect is expected to start in the fourth quarter of 2019 and the properties of VLSFO may differ from those stated in contracts. As a result, certain changes in contract terminology and timing relating to BAF will be needed to be modified to accommodate the overall change.
STL Shipping and EUKOR would like to take this opportunity, one year out, to outline some of the key principles that will form the basis of our IMO Sulphur 2020 response and policy. These principles apply for both current contracts and new business:
- Due to the singular impact on estimated compliant fuel prices, EUKOR will shift the calculation base to a suitable VLSFO industry price benchmark from 1st Oct 2019, being the basis for BAF surcharges effective 1st Jan 2020. It should be noted that from an operational perspective, EUKOR will need to commence purchasing and consuming VLSFO from mid-2019 as on-board reserves of 3.5% fuel will need to be exhausted prior to 1st Jan 2020.
- The principle outlined in point 1 will also apply to Tariffs and Tariff BAFs, including but not limited to contracts pointing at Tariff BAFs.
- From a BAF calculation perspective, VLSFO will be considered the new standard and, therefore, any contracts and BAF clauses referencing a particular grade of fuel or sulphur content will, from 1st Oct 2019 refer to an appropriate and compliant VLSFO price benchmark (bear in mind that this may be Marine Gasoil (MGO), if this is the only commercially available product).
- The chemical properties of future VLSFO are not yet known. Therefore, EUKOR reserves the right to amend any contractual viscosity (CST / Centistoke) references to a suitable reference, or to delete them entirely.
- Given the uncertainty around future geographical availability of VLSFO, EUKOR reserves the right to change the stipulated location of the VLSFO benchmark pricing.
- For contracts running into 2020 with no provisions to adjust BAF, EUKOR will implement an Emergency Fuel Surcharge (EFAF) to cover the price difference between former 3.5% fuel and VLSFO.
- Existing ECA (requiring 0.1% sulphur content fuel) based SRCs will be adjusted relative to the new VLSFO price benchmark.
STL Shipping and EUKOR will remain in close contact with customers throughout 2019 and share further information as it comes to hand. This is a regulatory change with far ranging impacts for global shipping and we want to ensure each customer understands the ramifications for their business. Regular updates will be available in the future and please feel free to discuss this topic during your meetings with STL Shipping.
We would like to take this opportunity to thank you for your ongoing business.