Shipowners striving to comply with IMO 2020 will affect other industries as well. It’s not just the bunker prices and refinery industry but growing demand for low-sulphur crude oil that will also drive up the competition between shippers and global steel and aluminium industry. Maritime sector, which consumed 3.8 million barrels per day of fuel oil in 2017, is attributed for half of global heavy fuel demand. It is, therefore, believed that IMO 2020 will potentially be highly disruptive to the oil pricing as well as availability. Needless to say, shipping freight rates will also increase because of higher fuel costs, pushing up prices of all goods transported by sea.
The International Maritime Organisation (IMO), as the prime maritime regulating agency of the UN, has set some stringent standards for global shipping, which has always been accused as one of the biggest pollution makers.
IMO, under Annex VI of the MARPOL has compelled all ships to reduce the level of sulphur dioxide (SO2) in their engine emissions from 3.5 percent to 0.5 percent from January 1, 2020. In the Emission Control Areas (ECAs)in the North America, Canadia and US Caribbean Sea Areas the sulphur discharge limits have been restricted upto 0.1 percent or less.
It may seem a simple environment friendly ruling that aims to cut down harmful emissions from maritime transport approximately by 80 percent, but the ramifications of this change ripples across the oil value chain and other industries as well. Apart from shipping industry, implications will also trickle down to steel and electric vehicle batteries manufacturers, crude oil producers, refiners and other consumers. In order to comprehend the implications of IMO 2020 on global economic trends, we need to understand the consumption pattern of low sulphur fuel.
An increase in freight rates for transport of raw materials, such as iron ore and coal, will definitely be a triggering factor to increase costs for steel production. But Needle Coke would likely to play a significant role in nurturing the future industrial trends. In addition to steel and aluminium manufacturing, the electric vehicles production will also be affected due to increased demand of low sulphur fuel by shipowners.
Needle Coke is one infamous component that is essential for both industries and can only be obtained from low sulphur crude oil. Needle Coke produces graphite electrodes that are used to either melt steel scrap in an electric arc furnace (EAF) or to maintain the temperature of molten steel. It is also used to derive synthetic graphite that is uses in rechargeable batteries of electric vehicles (EV). Environmental challenges and concerns over climate change have fashioned the use of electric vehicles as energy efficient and environment friendly option in the developed countries. According to estimates, by 2025 electric vehicles will account for six percent of all sales in the global vehicle sector.The expected sale of EVs would increase demand of needle coke by 250 KT from current levels; it seems to have become an increasingly popular ingredient at a time when supply is tightening.
Increased demand of low sulphur fuel after IMO 2020 for bunkering will likely to impact supply of needle coke and may increase its price as well. Ultimately, steel sector will either have to contend with shippers for feedstock; otherwise they have to finance innovative solutions and technology to ensure a constant supply.
Either way, IMO 2020 is likely to mean an increase not only in the cost of low sulphur crude oil but also that of needle coke.
IMO, as the prime maritime regulating agency of the UN, has set some stringent standards for global shipping, which has always been accused as one of the biggest pollution makers
According to estimates, global oil refiners will only be able to produce 1.5 million b/d of low sulphur fuel oil (LSFO) to meet the current demand of the shipping sector. However, it is still believed that High Sulphur Furnaceoil (HSFO) demand will be sustained by non-compliant vessels that account for about 10 percent of global fleet (an estimated figure for the year 2020). Some ships, due to non-compatibility or non-availability of low sulphur fuel, will continue to use traditional oil. The expected rise in use of marine gasoline, which is an expensive fuel choice, will also implicate the freight rates.
Experts have already raised the alarm about the potential implications of IMO on maritime sector in coming years. Maritime expert and Advisor to Chamber, Captain Anwar Shah says, “The trends in oil and shipping industry are changing under the impetus of the new legislative framework. The implementation of Sulphur Cap under MARPOL VI doesn’t only restrict ships to change fuel choices but also calls for strict port state control inspections. Some ships may be non-compliant but must carry evidence of non-availability of LSFO and keep compliance register on board to satisfy port state inspector. Some shipowners are opting for scrubbers to be fitted costing, say two million dollars and keep using HSFO.”
It is significant to highlight that MARPOL Annex VI does not obligate the refineries by any mean to change their procedures, but the demand for quality fuel will advance changes in refineries. Technologically advanced refineries will remain competitive as compared to moderate setups that cannot handle heavy crude to produce quality petro products.
Therefore,refiners have to invest in modern technology so that sulphur can be extracted from the crude at source. The approach of shipper as well as refiners to adapt to this energy transition will prove to be a turning point in the history of maritime transport, and over the next few years, it will have positive effects on global environment.
The writer is IOI Ocean Ambassador to Pakistan and a maritime researcher