IMO 2020 regulations

The IMO (International Maritime Organization) has set new regulations into place 1 January 2020 to limit the sulphur oxide (SOx) emission of ships.

The limit of the sulphur content will be cut from currently 3,50% m/m (mass by mass) down to 0,50% m/m outside of designated emission control areas (ECAS). Within the ECAS the sulphur limit is 0,10% m/m and covers the Baltic Sea, the North Sea area, the North American area (designated coastal areas off Canada and the U.S.) and the United States Caribbean Sea area (around Puerto Rico and the United States Virgin Islands).

The regulations from the consumer's point of view

Ships must use oil with a low enough content of sulphur or marine gasoil (MGO) to meet the new regulations. This might lead to an abundance of 3.5% fuel oil, also called high Sulphur fuel oil (HSFO), which again will most likely cause the price to drop. This has already led the difference (spread) between HSFO and MGO to increase. The future development of the spread is at the moment uncertain. There are however opportunities:

1. You can hedge through buying the spread between the HSFO and its alternative, MGO, to make sure your competitiveness doesn't decrease any further as the spread increases.
2. You can install a scrubber in your ship and take advantage of the current spread. A scrubber is an exhaust gas cleaning system that removes sulphur oxides from the ship's engine and boiler exhaust gases. This allows the ship to continue using HSFO. However, should the spread decrease the payback time of the scrubber will be prolonged which is why Global Risk Management offers you to hedge the spread.

The basics

• With scrubbers the cost base is derived from high Sulphur oil fuel prices
• Without scrubbers the cost base is derived from marine gasoil prices
• The spread between HSFO and MGO will establish fuel savings
• The spread is subject to market changes and should be hedged to lock in savings
  • Buy HSFO hedge
  • Sell MGO hedge

 Read more about the scrubber hedge here