CAI International Blog

IMO 2020: Supply chains brace for market challenges on the horizon

As the end of 2019 approaches, supply chain and logistics professionals alike are bracing for the effects of the International Maritime Organization’s low-sulfur regulations. What CNBC coins as “the biggest change in oil market history,” the new IMO standard will reduce sulfur emissions by over 80%. Under the new regulations the maximum fuel oil sulfur limit will reduce from 3.5 weight percent (wt%) to 0.5 wt% starting January 1, 2020. Currently, the most commonly used marine fuel 

has a sulfur content of around 2.7%. With 90% of the world’s trade carried by sea, importers, exporters, logistics companies, and some of the world’s biggest oil producers are preparing for the effects on the industry.Hurricane season is well underway, and many companies find themselves unprepared for the disastrous tolls it can have on their business. Based on a 2017 survey from FM Global, over 60% of company executives felt that hurricanes had an “adverse effect on their business” and that they were “not completely prepared” to handle the effects of hurricanes.

Industry Concerns

IMO’s overall goal is to promote cleaner air. According to a 2016 study conducted by the International Maritime Organization, the new regulations can prevent 570,000 premature deaths caused by the health impacts of sulfur oxides in the next five years. While the clear health and environmental benefits might make this regulation a no-brainer, there are a lot of complex factors at play that make the new standard challenging for the industry to embrace. For example, analysts and logistics professionals are predicting that the new standards will increase fuel pricing and availability, increase costs for importers and exporters, and create an oversupply of high-sulfur fuel oil.

Executive Insight

In the face of these upcoming changes, the CEO of CAI International Victor Garcia spoke with Russell Goodman, the editor-in-chief of Supply Chain Brain and shared his opinion on the two changes that need to occur.

“Complying with IMO 2020 is going to be accomplished in one of two ways. One, by putting on scrubbers to reduce the amount of sulfur that gets emitted. Or two, all ship owners need to shift to use low-sulfur fuel, which at this point comes at a substantial premium to regular fuel. So the real question is, how is that (price differential) going to be passed on into the market? Who is going to bear that cost? And that is a real issue between shippers and ship owners...Fuel is one of the major variable costs for any shipping line, so when you are talking about a 50% increase in one of your costs, someone is going to have to absorb it.”

How can CAI Logistics prepare you for IMO 2020?

As we turn the corner into 2020, CAI Logistics suggests being proactive, staying up-to-date on the latest market studies and reports, asking questions, and evaluating your current programs. Specifically, if you import or export, inquire with your forwarder about how they are addressing the IMO, and if there will be an IMO diesel fuel surcharge. You will want to discover in advance how IMO will impact your pricing.

For domestic shipping, review your current fuel surcharge program with your transportation providers. If you get all-in pricing with fuel included, it will be important to address this with your providers and ask in advance how billing will be handled. We would also recommend tracking diesel prices, and reviewing these prices weekly with your team so your customer service and sales contacts are aware and prepared to make adjustments if needed.

It’s important to keep an eye on what’s coming in the future when making decisions about your company’s logistics operations. But in such a fast-paced industry where no two days are the same, staying up to speed can be a challenge.

For more information about IMO 2020, you can visit their FAQ page.

CAI has decades of experience in providing customers all around the world with services that always fit the current challenges of the market. For container equipment needs, contact CAI today.