SOx rules could cause fuel prices to rise by 185%, while supply dries up

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An unseen crisis is looming for Europe’s haulage and inland distribution systems as a result of recent legislation passed to limit shipping emissions.

European Union legislation due to come into force at the beginning of 2015, which designates the English Channel and North and Baltic seas as Special Emissions Control Areas (SECAs), will see the amount of sulphur burnt in marine fuel come down.

Here’s the technical background: under International Maritime Organization – the UN body that governs shipping – regulations (MARPOL Annex 6 amendment, to be precise), in 2020 all vessels globally will not be allowed to burn fuel that has more than a 0.1% content of sulphur oxide (SOx). The current level is 1%, reduced from 1.5% in 2010. However, in the Channel, North and Baltic Seas, and all around the US coast, the 0.1% limit is due to be introduced on Jan 1 2015, which shipowners fear could cost so much that some will be driven to bankruptcy – one common estimate is that the cost of compliance in just one SECA is likely to be $3.5bn annually.

But there are also considerable structural problems with the introduction of the 0.1% SOx level in 2015, the foremost of which is that there is unlikely to be enough of the distillate marine fuel – which to all intents and purposes is the same fuel that the continent’s haulage industry uses – that would bring ship operators under the 0.1% level available in the region.

On the face of it, this is the sort of technical requirement for shipowners that forwarders and hauliers can happily ignore, other than to prepare for increased freight rates as shipping lines will have to pay far higher fuel costs, burning diesel rather than the heavy fuel oil that vessels burn today.

The real issue, which should concern anyone involved in the supply chain in Northern Europe is the tremendous squeeze that this will put on supply. At the Marine Propulsion conference held in London in March, it was estimated that the new regulations will mean that Europe will require an additional 27 million tonnes of distillate diesel per year.

That is a massive amount, given that today Europe doesn’t refine the amount of diesel it uses and is a net importer of the stuff, but how and who will supply this extra 27 million tonnes? Doubts have been raised that there simply isn’t enough refining capacity globally to cater for that sudden leap in demand, and hauliers and logistics companies – not to mention farmers, car drivers and households that use diesel as a primary fuel source – will suddenly find themselves competing with shipping lines for an increasingly scare fuel source.

One major impact will be on prices. One source told The Loadstar that a tonne of distillate diesel will increase from today’s level of $700-800 to $2,000 by 2020, and that is a conservative estimate.

In his evidence to the House of Commons select committee on transport late last year, P&O Fleet director John Garner said: “These proposals just haven’t been thought through. Increasing the cost burden on shipping companies threatens jobs and risks a modal shift that would see more trade moving by road as the cost of sea transport rises. This could have a significant effect on the environment, making a mockery of attempts to cut emissions.”

However, this argument ignores the fact that, firstly current haulage capacity in general is “stretched” in Northern Europe and would be unable to cope with a sudden increase in volumes; and secondly, truckers are likely to be facing the same cost increases as lines as they compete for the same fuel.

Next week: The Loadstar considers the alternatives