Transport emissions, new regulations and Supply Chains

Roger OakdenLogistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

International shipping trade and containers

Freight transport and emissions

Transport accounts for about 65 percent of world oil consumption and has responsibility for the fastest growth in global emissions. This obviously cannot continue. Although the road and rail transport sectors emit the major part of all transport emissions, responsibility for their reduction is with national governments. But this is different for global air and sea transport.

Freight movement is measured in tonne-kilometres, that is, the number of tonnes of freight transported, multiplied by the number of kilometres travelled. Freight transport demand is projected to triple from 110,000 billion to around 330,000 billion tonne-kilometres between 2015 and 2050. An optimistic scenario assumes that low-carbon technologies will have been deployed, but that overall emissions in 2050 will remain at 2015 levels. Source: International Transport Forum (ITF), an organisation within the Organisation for Economic Co-operation and Development (OECD)

Freight transport is responsible for about 40 percent of total transport emissions. About two-thirds of this is attributable to road and rail movements, with road transport increasing in Asia and Africa, where rail infrastructure is insufficient.

Aviation emissions have increased about 70 percent between 2005 and 2018 and are forecast to increase by more than 300 percent to 2050. Reductions in emissions will occur through using bio-fuels or gasses such as helium and hydrogen, but nothing has been mandated to date.

The remaining sector is marine transport. The China Daily Asia (May 20, 2016) stated that “one large container ship at sea emits the same amount of sulphur oxide gases as 50 million diesel-burning cars”, requiring the shipping industry to act. The accuracy of this assertion has been analysed.

At sea, ocean going ships burn heavy ‘bunker’ fuel oil (the residual oil that remains after crude oil is refined) and use diesel oil when manoeuvring within ports. To reduce emissions, ships can eliminate bunker fuel oil and use diesel oil, marine gas oil (MGO) or liquefied natural gas (LNG) or install an emissions scrubbing mechanism on a ship.

Given the high level of emissions, the United Nations’ International Maritime Organisation (IMO) has mandated that from January 1, 2020, ships are to produce a maximum of 0.5% in sulphur emissions rather than the 3.5% limit currently in force. The European Union (EU) has also directed that a 0.1 percent sulphur content in emissions be applied to ships berthed in European ports. To support the new regulations, Denmark and Norway plan to use ‘sniffer drones’ for detecting the sulphur content in ship’s emissions.

Using the difference in price between heavy fuel oil (HFO) and low-sulphur fuel oil (LSFO) at about U$200 per tonne, analysts have calculated the additional cost for a 20,000 TEU ship at about U$50,000 a day. The cost of installing a scrubber system for this size of ship is about U$8m, with four to six weeks in port for the scrubber to be installed (taking capacity from the system). However, there are few manufacturers, with limited production capacity and not much time remaining for a retrofit.

Additional costs and their implications

Fuel costs can represent up to 60 percent of a ship’s total operating costs, depending on the type of ship and trade lanes used. In 2020, this could result in an increase in ship operating costs of between ten and twenty percent.

The container shipping lines estimate that the new regulations will cause an additional annual cost of about U$10 billion. The two largest container shipping lines estimate their annual extra costs at more than $2 billion each (about U$100-175 per TEU, depending on the length of voyage). Due to the limited number of major refuelling ports around the world (Singapore is the largest), the increased fuel costs will be passed through to customers before the regulations take effect, as ships take on diesel fuel for long voyages . Other shipping companies are likely to match this approach.

To absorb some of the additional costs, older vessels (over about twenty years) could be scrapped, although the continual construction of larger container ships may not affect overall capacity. To conserve fuel, but increase transit times, the operating process of ‘slow steaming’, where a ship’s speed is reduced, could be further implemented.

Bloomberg Intelligence reported that at May 2019, about 67 percent of the shipping industry was not compliant with the new regulations and 65 percent of refiners were not ready to supply the increased requirements for diesel fuel oil. If this situation persist through the balance of 2019, it could cause a short-term increase in fuel prices.

In 2018, shipping companies implemented the ‘emergency bunker surcharge’ as a cost recovery from shippers to cover increased fuel costs. If refineries do not have sufficient capacity to meet the new demand, commentators consider that shippers could receive a 15-20 percent increase in their ‘emergency bunker surcharge’.

However, shippers will argue that any increase is unfair, due to trade lanes and commodity types having different freight rates, depending on demand; vessels do not always carry full loads and fuel prices change. But, with only a few consortium controlling the majority of container cargoes, they are likely to be successful in imposing a surcharge. 

In the current global economic situation, contract manufacturers (mainly in Asia) will most likely be expected to absorb their part of any increased costs and will therefore be unlikely to raise the ex-factory price of consumer goods. However, major brand companies experiencing a global sales slowdown and increased tariffs in the US could ask retailers for higher prices.

Road transport companies may be affected because the wholesale price of diesel used in trucks could increase, commencing in the fourth quarter of 2019. These additional costs could be passed up through supply chains, but small and mid-sized road transport businesses may not have the negotiating leverage to recoup the additional costs. And this applies to other users of fuels, such as air cargo and farmers.

As with the increasing tariff and non-tariff actions by government, when the effects of increased shipping costs become apparent, it will cause exporters and importers to review their sourcing strategies, suppliers and shipping arrangements.

Share This Page

About the Author

Roger Oakden

LinkedIn Twitter Facebook

With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

Leave a Reply

Your email address will not be published. Required fields are marked *