From 1 January 2020, a new regulation from the International Maritime Organisation (IMO) will come into effect. From this date, the limit for sulphur in fuel oil used on board ships (outside Emission Control Areas) will be reduced to 0.5%. At present, the permitted sulphur content is still 3.5%.
The introduction of the new global sulphur cap of 0.5% will result in the use of low sulphur fuel oil (LSFO) which will reduce sulphur pollution from shipping by more than 80%. The new regulation will have a significant positive impact on the environment.
How will the change affect you?
The cost of compliance with the new regulation as per 1 January 2020 will be significant since the cost difference between the most commonly used High Sulphur Fuel Oil (IFO380) and Low Sulfur Oil (LSFO) will be significant and will give a yearly extra cost to carriers of multiple billions of dollars. It is also expected that the volatility of fuel costs for shipping will increase as the regulation to use LSFO enters into effect.
when will the extra costs for imo2020 be charged?
In order to meet the IMO2020 regulations as of 01.01.2020, the cleaner bunker will be used by the first ships from beginning of fourth quarter 2019 already. Hence, extra costs for IMO2020 can be expected already in the fourth quarter of 2019.
how is the baf calculated?
Freight rates will be determined by a formula based on the recent historic price development (either monthly or quarterly):
Fuel rate will be based on the difference between the actual and the average bunker costs from the previous quarter/month. This difference (when surpassing a certain hedging point, plus or minus) will be multiplied with a ‘trade factor’, depending per trade lane on variables like transit time, distance, capacity, occupation, fuel consumption and trade imbalance, in order to come to a Bunker Adjustment Factor (BAF) per TEU.
FUEL PRICE PER TON X TRADE FACTOR = BUNKER ADJUSTMENT FACTOR