IMO 2020 s pending impact

Transcription

1 IMO 2020 s pending impact

2 As the shipping industry comes to grips with the International Maritime Organization s (IMO) January 1, 2020 regulatory requirements to substantially reduce the Sulphur content in marine fuels, many served by the shipping industry are largely unaware of the potential impact of the these and other environmental regulations. These regulations will certainly provide welcome reductions to the level of air pollutant emissions from shipping, however, they will also have a significant bearing on the cost to carry freight. Container lines are looking at increased annual fuel costs that could be as high as $12 billion. Further estimates show that it may be realistic to expect additional cost up to $200 per TEU just for fuel. Container lines are looking at increased annual fuel costs that could be as high as $12 billion. The price of diesel fuel for truck and rail transportation is also expected to be impacted and needs to be better understood. At present, marine fuels do not significantly compete for the middle distillates used to refine diesel. Low Sulphur marine fuels do however require middle distillates and are predicted to influence diesel prices. The International Energy Association(IEA) has estimated a 20% to 30% increase in diesel prices as the demand for low Sulphur marine fuels spikes in early

3 The International Energy Association (IEA) has estimated a 20%-30% increase in diesel prices as the demand for low Sulphur marine fuels spikes in early Very few ocean carriers have publicized the estimated impact of these regulations until very recently and most have been struggling to find an effective solution for compliance. For a diverse set of reasons, the clear majority will need to resort to using compliant low Sulphur fuels (LSF), which have a significant cost premium compared to the other two options: Heavy Fuel Oil(HFO) with exhaust gas cleaning systems (so called scrubbers) and Liquified Natural Gas (LNG). For the carriers choosing the LSF option, cost pressures will increase dramatically and serious mitigation efforts should be expected. Slow steaming may be tempting for many. Accelerated recycling of unprofitable vessels under the new regulations may also be seen. Both actions have the potential to impact overall capacity and service levels. Certainly, fuel surcharges in many trades can be expected to increase, possibly with dramatic effect. The other two options, HFO with scrubbers and LNG are seeing traction from vessel owners, but not to the extent of those choosing low Sulphur fuels. Some owners have opted to install exhaust gas cleaning systems to take advantage of HFO and its lower costs but the infrastructure to assemble and install these systems is new and capacity is limited. Access to HFO may also be at risk as demand drops dramatically in early It is unlikely that a significant percentage of vessels will be converted for continued use of HFO by 2020 and the immediate years following. LNG fuel is gaining more and more support. It is in use today in select shipping trades and the results have been most encouraging. Tote s Puerto Rico container service has been using LNG for almost three years and others, seeing 2

4 the benefits, are following their direction. The decision by CMA/CGM to invest in LNG fueled mega vessels and LNG bunkering infrastructure for its Asia Europe trade is further testament to LNG s potential. Regardless of its environmental benefits, competitive cost and fast growth rate, the number of LNG fueled vessels entering service through 2020 will remain a small percentage of the total fleet. As important as the ramifications from the 2020 Sulphur regulations are for all, it only tells part of the story. GHG emission reduction ambitions have already been defined by the IMO and more stringent particulate matter emissions are likely to come. All areas of shipping will continue to face ever more rigorous environmental requirements, each requiring significant and far reaching transformation. Going forward, current and future regulations to be enacted by the IMO and the decisions ocean carriers make to comply, will continue to powerfully impact supply chains. All stakeholders, whether carriers, customers or consumers dependent on international intermodal supply chains, have a significant interest in the IMO s pursuit of stronger emissions regulations. While environmental initiatives are essential for Global health, the issue of who will ultimately shoulder the burden is obvious. It is the ultimate consumer. communication and engagement across the intermodal value chain to deal with the international regulatory process and the ramifications of its regulatory decisions. At a minimum, all parties in the industry must be better prepared. At best, greater collaboration that develops mutually beneficial innovative approaches and solutions should bring about a stronger influence on the regulatory process and ultimately reduce cost exposures while contributing to important environmental initiatives. Now is the time to establish more active 3

5 INTRODUCTION: While the maritime industry has been heavily engaged with the regulatory process aimed at reducing air pollutants (SOx, NOx and PM) and greenhouse gas emissions at the international, regional and national levels, most of the industries stakeholders have not and are woefully uninformed. We have developed this paper to raise awareness among cargo interests and other important stakeholders. The aim is to provide some background on the development of the regulations, clarify the regulations themselves and point out the options available for compliance. We also seek to inform all stakeholders of the potential impact of the regulations which are substantial. Shipping lines will be required to meet expanded and significantly more stringent regulations aimed at reducing health harming pollutants such as SOx and NOx. They will require that noteworthy changes be made to the way ships operate today and the fuel they use. While particulate matter (PM) is not yet regulated, indications are that this will change in the coming years as the environmental community focuses more attention on this health hazard. As a follow up to these regulations, the maritime industry s international regulator has agreed on an initial strategic plan and ambition for the reduction of greenhouse gases (GHG) from SHIPPING INDUSTRY EMITS ~2.1% GLOBAL GHG EMISSIONS ships. For perspective, the shipping industry emits approximately 2.1% of global GHG emissions. This is a relatively small percentage of global GHG emissions but likely to rise to about 3% as global trade grows and (if) the Paris climate agreement targets are met. This initial strategy for GHG reduction, in the short term, will have limited impact. However, for the medium and long term, the targets set for 2030 and 2050 for the industry will require substantial investments to find solutions that will meet these aggressive targets. Considering the service life of ocean going vessels, 20 plus years, the maritime industry will clearly have challenges in dealing with vessels already in service and with ordering vessels that can meet the ever more challenging regulatory targets. Regardless of how the shipping industry adapts to the more stringent regulations, it will face capital investment and/or operating cost challenges that will likely have substantial implications for all of those involved in the intermodal industry. 4

6 THE MARITIME INDUSTRY INTERNATIONAL REGULATORY FRAMEWORK: While the shipping lines and logistics providers are well recognized by most involved in the intermodal supply chain serving the U.S. market, the maritime industry contains many different parties serving the shipping industry. These businesses provide their own unique value to the shipping industry at large and have a range of objectives and interests. Examples of important segments of the maritime industry include: shipyards, classification and risk assurance businesses, fuel providers and brokers, original equipment providers (OEM s), Naval architects and vessel designers, ship brokers, banking and finance, ship owners, ports, terminal operators and an assortment of others. Further and unlike the national, state and local the maritime industry has a significant and important need for consistent international regulations level regulations with which most stakeholders normally interact while performing their business, the maritime industry has a significant and important need for international regulations. Transporting freight between nations and across continents requires a consistent set of regulations to ensure that shipping lines can function safely and effectively no matter where their vessels are operating. The international regulatory responsibility is that of the International Maritime Organization (IMO), an agency of the United Nations. For environmental matters, the IMO has set up the Marine Environmental Protection Committee (MEPC). MEPC is the primary venue for developing and negotiating ambitions and regulatory frameworks regarding environmental issues. The IMO regulations, once in place, have the power of International Treaties and are enforced through a variety of national entities whom also are represented in the IMO. The United States, for example, is a voting member of the IMO and has a seat on the MEPC. The U.S. Coast Guard has an important role enforcing the international regulations agreed at the IMO for US flagged vessels and non-us flagged vessels operating in US waters. The IMO is where the emissions regulations on which we focus in this paper are developed and promulgated. 5

7 IMPORTANCE OF SHIPPING: paper centers on container vessels making up approximately 14% of the global fleet and are key to the movement of consumer goods. Global trade is highly dependent on a properly functioning maritime industry with 80% of global trade by volume and 70% by value being moved by ships. Over 50,000 vessels operate globally and are registered in 150 nations. There is no question that without shipping, global trade would cease. Despite the importance of shipping, the industry is often overlooked as the efficient nature of its activities represent a relatively small percentage of the cost of goods sold. The vast amount of freight moved on a vessel at any given time certainly makes it the most efficient means of transportation in terms of cost and air emissions per ton mile of freight carried. There are a variety of specialized ships serving different trading needs. Bulk vessels are the largest segment carrying commodities and raw materials followed by tanker vessels serving the petrochemical industry. Our focus for this Container vessels use about 22% or 66 million tons of the 300 million tons of fuel used annually by the global fleet of vessels. Fuel consumption is a critical concern. Container vessels use about 22% or 66 million tons of the 300 million tons of fuel used annually by the global fleet of vessels. Container vessel fuel consumption varies between vessels for a variety of reasons. Efficiency of the hull design, propulsion systems, vessel size, operating parameters, etc. are typical examples of how fuel consumption may be influenced. One could place a rough number on daily consumption at sea. At a low consumption of 50 tons per day or even at a high of 150 tons per day, over the course of a year the amount of fuel consumed by container vessels is substantial. The container shipping industry has a responsibility to comply with IMO s air emissions rules and work diligently toward meeting the future GHG regulations. All major liner operators are positioning themselves for compliance with IMO regulations, the vast majority planning on the use of low Sulphur fuels and a select group moving early for new solutions such as LNG. 6

8 EMISSIONS REGULATIONS A DESCRIPTION: The regulations related to air emission pollutants have been developed by the MEPC and agreed on by the IMO. These regulations have evolved over time and several requirements are already in effect in select national and regional zones. The most impactful components include: Regulation to reduce harmful air pollutant SOx and NOx emissions. The allowance for the establishment of Emission Control Areas (ECA) by member nations. In North America, there is an Environmental Control Area which came into effect January 1, 2015 that surrounds the continent to a distance of 200 miles. This reduced the allowable Sulphur content in marine fuel from 3.5% to.1% and put in place progressive reductions in NOx emissions from marine diesel engines with the most stringent requirements becoming effective for engines installed on a ship constructed on or after January 1, 2016 operating within the ECA. Implementation of a global Sulphur Cap requiring a maximum Sulphur content in marine fuel of.5% effective January 1, This means that vessels will be banned from using marine fuels above.5% Sulphur content, a major change for the maritime industry as well as the energy industry and its refining capacity. Establishment of efficiency measures, specifically the Energy-Efficiency Design Index (EEDI) for new ships and associated operational energy-efficiency measures for existing ships which became mandatory in In effect, this index is designed to measure and pursue more efficient use of marine fuel. The Initial Strategy identifies the following levels of ambition for the international shipping sector: carbon intensity of the ship to decline through implementation of further phases of the energy efficiency design index (EEDI) for new ships»» carbon intensity of international shipping to decline by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to

9 GHG emissions from international shipping to peak as soon as possible and reduce by at least 50% by 2050 compared to 2008 whilst pursuing efforts towards phasing them out on a pathway of CO2 emissions reduction consistent with the Paris Agreement temperature goals IIn summary, the introduction of the global Sulphur cap in 2020, enforcement of the previously established ECA s, the continuous drive for better EEDI measures,the agreement on the Initial Strategy for GHG and expected future more stringent regulations of PM will make significant reductions to the emissions of local air pollutants and GHG. It will also require the shipping industry to make an abrupt and transformational change that will have dramatic effects on their costs and operations. 8

10 COMPLIANCE ALTERNATIVES: Ship owners and operators have options to comply with the global Sulphur cap of.5% being implemented in The compliance alternatives are more limited for the GHG ambitions contained in the Initial Strategy. A hybrid set of solutions will likely be required for the 2030 and 2050 GHG reduction ambitions. Options to meet the Sulphur cap being imposed include LNG; the continued use of high Sulphur fuel oil (HFO) with exhaust gas cleaning systems (also known as scrubbers); and new formulations of ultra-low Sulphur fuels (ULSF) combined with marine gas oil (MGO). A hybrid set of solutions will likely be required for the 2030 and 2050 GHG reduction ambitions. Each of these options can be used and all are technically feasible. The choice the shipping line makes will be influenced by a variety of considerations including: Safety of operations and real Corporate environmental commitment Return on investment due to either capital investments and/or increased operating costs Access to financing Ability to recover excess cost of fuel and 9

11 forecasters estimate an increased cost in the range of $ per ton or more for low Sulphure marine fuels that will meet IMO 2020 regulations capital expenses incurred for compliance Degree of future protection from more stringent regulations Availability of equipment and ship yard capacity Each compliant option carries advantages and disadvantages. A summary for each option follows: LOW SULPHUR FUEL OPTION: The main advantage with the low Sulphur fuel (LSF) option is that it provides existing and new vessels a compliant fuel to meet the 2020 Sulphur limits. This can be used now with limited added capital cost beyond fine tuning and minor adjustments to propulsion systems onboard the vessel. There is no need to find shipyard capacity, deal with equipment orders or suffer vessel down time for retrofitting. However, there are several disadvantages. The primary one is the substantial cost differential moving from today s primary marine fuel, HFO. 10

12 Various forecasters estimate an increased cost in the range of $ per ton or more for low Sulphur marine fuels that will meet IMO 2020 regulations. There is some uncertainty on the level, but most forecast a substantial increase in cost. Some express it in percentage terms and increases range globally from a low of 40% over HFO to as much as 60%. Over the course of a year, the increased cost to the shipping line is hugely significant and is clearly the most expensive long-term option. Recently, Maersk, the world s largest operator of container tonnage and who will be using low Sulphur fuels for much of their fleet, was quoted as saying they would incur an additional $2 billion per annum in fuel costs. Hapag Lloyd estimated an annual increase in cost of $1 billion. Since most ship owners have not yet decided to take up scrubber or LNG solutions, the demand for ultra-low Sulphur fuels will move up sharply, adding further upward pressure on the cost per ton of this fuel. Another relevant concern is the availability and quality of the new LSF blends. In addition to the demand spikes mentioned above, there will be a need for new blends and refining capacity to reach the.5% Sulphur limits. Blending is feasible although there has been limited experience with mass scale blending for this type of fuel, especially across continental geographies. The risk of poor quality or non-compatible fuel supply has many in the industry concerned, at least for the near term. Incompatible or unstable fuel blends can damage marine engines and can become a serious safety and operational issue aboard vessels. Furthermore and of strategic importance, this option will yield no direct GHG benefit necessary to meet the IMO s Initial Strategy ambitions. HFO WITH EXHAUST GAS CLEANING SYSTEMS: Continued use of HFO is possible if the ship owner installs exhaust gas cleaning systems to remove the regulated pollutants. There are three general types of cleaning systems: Closed Loop Systems that contain any waste water Open Loop Systems discharge waste water to the ocean»» Hybrids operate in either open or closed mode. 11

13 These systems do require capital investment to the vessel. Estimates on the cost of these installations is between $4million and $8million dollars per vessel with the open loop version being less expensive and the hybrid and closed loop systems more expensive. Additionally, vessels consuming HFO require NOx abatement equipment. While significantly cheaper than SOx cleaning systems, $2million to $3million per vessel is a reasonable estimate depending on the ship. Estimated payback on the capital investments ranges from one to three plus years. The capital requirements for exhaust gas cleaning systems can deliver a relatively fast pay back to the ship owner and allow them to use lower cost HFO, but there are also important challenges to be considered. On the regulatory limits, should PM begin to get the regulatory scrutiny we already see in land transport, solutions will need to be put in place to recover PM. On the GHG ambition of the IMO, this option will not yield any benefit towards meeting the target. Due to the energy load to operate the scrubber, it has the potential to further increase GHG emissions. may also be an environmental risk. There is some debate as to the extent which open loop exhaust gas cleaning systems will continue to be allowed to operate. Ship owners need to set up their systems to ensure that any discharge to the ocean is managed in a manner that will comply with any future regulatory scrutiny. Perhaps the current critical challenge to deciding in favor of this option is the availability of the equipment and ship yard capacity to install the equipment. The amount of manufacturing capacity to produce the systems is limited to few original equipment manufacturers. It is likely that through 2020, the total shipping industry will have around 1000 vessels operating with exhaust gas cleaning systems. This is a trifling number in comparison to the overall fleet. As a result, HFO demand is expected to go sharply down forcing HFO bunker suppliers to consider withdrawing bunkering capacity from shipping. This may mean that many Ports around the world will no longer have the number of bunker barges and other infrastructure to support HFO due to the lack of demand, the cost of preparing and cleaning bunker tanks for different fuels which impact the profitability of the bunkering operation An operational failure of the exhaust gas cleaning system would put the vessel into a non-compliant state unless it had an alternative fuel option onboard the vessel as a backup. Discharging the waste water to the ocean by open loop systems 12

14 LNG: LNG, a fuel that has been used safely and effectively for fifty years in the transportation of LNG at sea, has several advantages. There is ample and scalable supply of LNG globally and the existing bulk infrastructure for moving LNG to the major markets for power generation, i.e. Japan, Korea, China, Europe, North America, South East Asia, is already in place. When assessing the supply infrastructure, it lines up well against the major container shipping routes. CMA/CGM, for example, has access to LNG in Rotterdam and Singapore for its ultra large container new build vessels that will serve the Asia Europe trades. LNG is competitively priced with HFO and tends to be less volatile. The energy content in a ton of LNG is also higher than in a ton of fuel oil by about 20%. Comparing the two requires a calculation to ensure an apple to apples comparison. Further it is a cleaner burning fuel that has a positive impact on vessel maintenance and performance. Energy Content in a by about 20% Air pollutants are another major consideration. LNG offers exceptional emission reductions compared to either LSF or HFO with exhaust gas cleaning systems. It emits zero SOx and virtually zero particulate matter (PM). Compared to existing heavy marine fuel oils, LNG can, depending on the technology used, emit 90% fewer NOx emissions. LNG s greenhouse gas (GHG) performance represents a major step forward when compared with traditional marine fuels. Utilizing best practices and appropriate technologies to minimize methane leakage, realistic reductions of GHG of 10-20% over conventional oil-based fuels is possible and has been demonstrated. Of the three compliant options, LNG provides a much more future fit solution especially when combined with advances in hull design, more efficient propulsion solutions including advanced gas turbine technology and future renewable technologies and renewable natural gas. The ship owner is also confronted with challenges related to the use of LNG fueled vessels. The first is the current state of LNG 13

15 marine fuel bunkering infrastructure. Access to LNG would be essential and the number of bunkering ports, while growing fast, are still limited depending on where the ship will trade. In certain markets, such as the Asia/Europe, America/Europe, Asia/America, US Jones Act trades and North America/South America LNG bunkering is already in place in selective ports and will be better positioned by 2020 with more to be put in place soon after. On the capital cost front, newbuild vessels have a premium around 15-20% to cover the cost of engines, LNG tanks and fuel systems. While this premium is decreasing as economies of scale develop, they need to be considered. Despite that premium, over the course of the life of a vessel, LNG still offers a significantly better economic case than LSF due to LSF s high fuel cost premium. LNG can also be very competitive against HFO with exhaust gas cleaning systems from an investment payback and long-term value perspective. LNG pricing is also relatively stable as about 70% of the cost of LNG is related to liquefaction and transportation. These costs can be essentially fixed so the only volatility is against the natural gas costs. With the high volume of natural gas available, little volatility in this market is anticipated. 14

16 FUTURE FUELS: There are various fuels being considered, developed or tested for the future. Renewable solutions such as battery and solar are being tested in small scale shipping operations, generally local ferries or coastal vessels plying short distance routes. These solutions, however, are not able to provide the scale and capacity to be a serious contender as an International cargo or container shipping solution. At some future point, though, they could be used in combination with other fuels such as LNG. Potential fuel types: Biofuels Methanol Hydrogen & Ammonia Biofuels, fuels made from carbon neutral sources such as organic waste from agricultural activities, may also be a future option, yet the scale required and the cost competitiveness is not forecasted to be viable for the foreseeable future. It is quite possible that biofuels could be used as drop in fuels for LNG, like how ethanol is added to gasoline in the U.S. Methanol, primarily made from natural gas, is another option that has been shown to be technically effective as a marine fuel. Though, global methanol capacity is far short of shipping s needs and there is still a significant capital cost to set up the vessel. Moreover, if natural gas remains the primary source feed stock, methanol is not likely to be competitive. There is discussion regarding the use of Hydrogen and Ammonia as potential fuels in the very long term. A variety of technical and safety reasons make it such that much more research and development needs to be done. These fuels are still very much conceptual and untested in the unforgiving maritime environment. Any new marine fuel will require extensive evaluation and testing before it is available for safe and effective use. Barring any unforeseen breakthroughs, these future fuels will not provide any meaningful impact to deal with the pressing needs of the shipping industry to comply with the IMO regulations for the foreseeable future. 15

17 IMPACT AND IMPLICATIONS: The IMO 2020 global Sulphur cap, efficiency measures and the Initial Strategy for GHG will have significant implications for a variety of stakeholders from society to consumers and all the supply chain participants dedicated to producing, moving, storing, processing and selling goods. HEALTH AND GLOBAL WARMING: The environmental benefits of cleaner air are highly significant from a societal point of view. The environmental benefits of cleaner air will clearly be significant from a societal point of view. Transportation by ship, while the most efficient way to move goods on a per ton mile basis, has traditionally used the lowest quality of fuel resulting in significant emissions of SOx, PM, and NOx. Port cities have often borne the brunt of pollutant emissions from ships. Health related issues attributable to these pollutants are well documented. The cost to society in terms of mortality rates and the cost of health care associated with these pollutants is substantial. The pursuit to reduce GHG emissions from all sources will continue over the long run. While shipping has a much more limited ecological impact with only 2.1% of global GHG emissions, it continues to be part of the global challenge. Accordingly, societal and governmental pressure to reduce its emissions footprint is not expected to abate. Reducing GHG emissions at the levels proscribed by the IMO in its initial strategy will be challenging for 16

18 An estimated $50 to $60 billion annual cost is expected to be seen across the entire shipping industry. the industry and will take a long adjustment period and technology advancements. All of the stakeholders in the intermodal system have a keen interest in the successful, effective and efficient movement of goods. All have also made significant commitments towards sustainability and environmental performance. Compliance with the various IMO emissions regulations will clearly improve the intermodal system s performance with respect to air quality improvement, and in the longer term, global warming. OPERATIONAL AND COST IMPLICATIONS: Major implications on the cost and service side of the supply chain will be seen as these regulations are enforced. For the container lines, the new technology and fuels required to meet the shorter and longer-term regulatory limits and targets will have a dramatic effect on the manner in which they operate. Moving to new propulsion systems or different marine fuels have a cost, but so does doing nothing. Present projections show that most ship owners will need to use much more expensive low Sulphur fuels. An estimated $50 to $60 billion annual cost is expected to be seen across the entire shipping industry. As noted earlier, Hapag Lloyd recently announced it expected its annual fuel bill to increase by $1billion per year. Maersk has publicly stated their annual fuel bill is expected to increase by $2 billion. Container carriers will have a significant interest in making correct compliance and business choices to minimize the impact from these 17

19 regulations on their financial health. Industry stakeholders must also expect and be prepared for the impact these regulations will have on their own business. What are the ramifications the industry will face leading up to and after January 1, 2020? They include, but are not limited to the following: Increased costs, fuel cost mainly Space and capacity issues Service level implications Impact on land-based costs, fuel related COSTS: Compliance costs are a concern for all. The amounts are projected to be significant due to the abrupt and massive switch from one fuel to another. From the start of 2020, shipping lines will need to comply. The change will be rapid. Since the clear majority will need to use the much more expensive low Sulphur fuels, the cost impact will be dramatic. To put this in perspective, the global container industry consumes roughly 22% of all marine fuels consumed. This translates into an estimated requirement to switch 50 million tons per year of relatively cheap HFO to much more expensive LSF. While forecasts for pricing of ULSF varies, they are substantial and are forecast to range from $150. To $250. per ton or more. This equates to an increase spanning $7.5 billion to $12.5 billion per year. We can estimate the increase in cost for main US cargo trades to be in the range of $150 to $200 per TEU shipped. Various trades and regions may expect variations due to sailing distance, geographic fuel pricing differences, efficiency of vessels serving the trade, etc. The risk for even higher cost per TEU is significant if the pricing for LSF increases further on a per ton basis, at least during the initial transition and demand spike. The recent announcement by Maersk indicates they will begin to adjust fuel surcharges as early as January 1, Most of the other major container lines have followed suit. The level of their proposed bunker fuel surcharges is yet to be seen. 18

20 CAPACITY: Capacity level is also expected to be driven by the 2020 Sulphur cap. First and foremost, many shipping lines have been suffering from marginal or negative returns. Without means to offset the increased fuel cost through operational synergies or cost recovery (i.e. bunker surcharges), returns will be further stressed. The number of container vessels serving various trades may be at risk of shrinking. Ship owners will likely increase the scrutiny on the profitability levels of their vessels and trading patterns. Smaller to medium size vessels may not yield the efficiencies larger and ultra large container vessels achieve. Those vessels will be pressed hard to make reasonable returns under the new cost situation. Further, many of the medium aged vessels have an age profile not conducive for many owners to consider retrofitting with exhaust gas cleaning systems or LNG dual fuel propulsion. Should the owners conclude that they cannot generate returns on those vessels, recycling may be an option and overall vessel capacity may decline SERVICE LEVELS: Today s modern supply chains are heavily dependent on an effective shipping industry. The need for performance against agreed lead times and precision targets remain strong. Service levels, however, could be one of the first casualties as the container lines consider their options to reduce the cost impact of the Sulphur limits. Slow steaming of vessels can dramatically reduce the consumption of fuel and it is relatively simple to initiate. Depending on the individual carrier s view on the financial gain from slow steaming when compared to the opportunity cost of reduced voyages, it is likely that some will use slow steaming to abate increased fuel costs. The increase in inventory carrying costs could be significant for the retailer. LAND TRANSPORT FUEL PRICES: The impact on fuel prices for trucking, rail and air services have not been discussed widely, however, diesel prices are expected to be impacted by the IMO global Sulphur cap requirements. The traditional use of HFO by ships has not been a competitive factor impacting diesel demand. With the need to replace

21 million tons of HFO with ultra-low Sulphur marine fuels, these marine fuels will place added demand on the oil products needed for diesel. The increased use of LNG would minimize this effect, but for the immediate term, it is forecasted to have limited effect. The International Energy Agency estimates that demand for diesel fuel will increase by at least 1 million barrels a day and could result in a 20% to 30% increase in diesel prices. The impact on inland transport costs could be significant from 2020 or earlier. 20

22 SUMMATION: all stakeholders should expect and prepare for dealing with the ramifications that these new IMO regulations will bring In summary, all stakeholders should expect and prepare for dealing with the ramifications that these new IMO regulations will bring. Shipping lines, who must comply, will need to find solutions and make difficult decisions most appropriate for their operations and business interests. For those that choose a more future fit fuel like LNG or HFO with exhaust gas cleaning systems, the capital cost will be a shortterm challenge offset by the operational cost savings from the use of lower cost fuels. For those that have opted to use low Sulphur fuels, the substantially increased fuel costs will be problematic for a long time to come. Either way, their choice is difficult and all stakeholders of the industry will feel the impact. Planning now, while not as timely as many would like, will be essential for effectively navigating through this transformative event in shipping. 21

23 REFERENCES: Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Crawford, H.S., R.G. Hooper, and R.F Harlow Woody Plants Selected by Beavers in the Appalachian and Valley Province. Upper Darby, PA: U.S. Department of Agriculture. Jenkins, S.H., and P.E. Busher Castor canadensis. Mammalian Species. 120:1-8. Coalition for Responsible Transportation