IMO2020: The Potential Impact and Effect on Trade Finance
Shipping is a crucial component of trade finance and anything that impacts the regulatory or financial standing of a vessel, a vessels ownership structure or how a vessel operates requires attention and assessment by trade operators at banks and other financial institutions.
One such impact is the IMO2020 regulation due to take effect from January 1st 2020. The International Maritime Organisation has initiated the IMO2020 policy to deal with the environmental impact of shipping, specifically the fuel oil used to power a vessel. Fuel oil used by vessels today mainly takes the form of HSFO (High Sulphur Fuel Oil) containing a sulphur content of 3.50%. The IMO2020 initiative sets a regulatory, upper limit on the sulphur content of fuel oil to be used by ships at 0.5%.
The aim of the new policy is to decrease the amount of emissions global shipping produces and it will affect around 60,000 ships currently in operation.
Vessels, therefore, need to comply with the IMO2020 regulation and there are a number of solutions available to them:
- Run entirely on LSFO (Low Sulphur Fuel Oils)
- Use an alternative energy supply such as LNG (Liquified Natural Gas)
- Install a 'scrubber' that acts as a gas cleaning system to reduce the sulphur content from HSFOs
Switching directly from HSFO to LSFO is the most straight forward option. Fuels such as Marine Gas Oil (MGO) have a low sulphuric content but are much more expensive compared to HSFOs. Even so, most vessels operating in north west Europe and North America are already using MGO due to emission control areas managing the environmental impact of fuel oils.
But the other two options; installing a scrubber and utilising LNG are more complex and costly. Scrubbers need to be retroactively fitted to the vessel and currently only 2% of the global shipping fleet has implemented one. LNG also poses problems due to vessel technicalities and it is unlikely in this regard that LNG will take off as the bunkering fuel of choice.
Therefore, whatever route ship owners and operators decide to adopt, there are implications of doing nothing or not being business-ready by January 2020. By no means are all vessels fully compliant with the new regulation.
Enforcement of the IMO2020 regulations will not fall to the IMO. Instead they will be managed by the port state control and the flag registries. These authorities will use bunker delivery notes, vessel documentation and bunker samples to indicate where infractions of the regulation occur.
Failure of a vessel to comply with IMO2020 can lead to a high fine, impounding of the vessel and even imprisonment of the ship's captain.
A case in point was enforced by the US Department of Justice in August 2019 when a tanker owner and operator were fined $3 million for failing to comply with fuel pollution regulations. The fuel used on the M/T Ocean Princess (IMO:9268291) exceeded the 0.1 sulphur content as specified by the US Caribbean Emission Control Area. The Ocean Princess remained at port for a lengthy period of time whilst checks were conducted on the fuel and the ship's crew were interviewed. This action led to lengthy delays in the vessels scheduled operations; it entered port in late-July and did not leave until mid-September.
Obviously, there are risks and costs for ship owners and charterers but what are the impacts for banks and financial institutions who finance the shipment of cargoes moving from location to location?
Recently, the IMO released a set of guidelines for the 'Consistent Implementation of the 0.5% Sulphur Limit'. These guidelines indicate how a vessel should and can be inspected but also notes that all efforts must be made to prevent a delay or detainment of a vessel due to the enforcement of IMO2020. Whilst this might be the intention, delays will be inevitable. The time taken to test and inspect fuel oil will have an impact on the time a vessel remains at berth, this will have a knock-on effect of increasing wait-times for a vessel seeking to enter a port.
Furthermore, non-compliance can result in the vessel being prevented from sailing until it has de-bunkered its non-compliant fuel oil. This is a costly and timely action as a ship pumps fuel oil 'in' rather than 'out'.
Therefore, the cost of non-compliance is high for all parties involved in the shipping of cargoes. For banks, financing the shipment of goods on a vessel that does not comply with IMO2020 regulations could mean a delay to delivery, a possible delay in the release of payment and in the worst case example of the M/T Ocean Princess, an impounded vessel and cargo with its crew detained by the port authorities.
In this context, it is vital that bank trade finance teams are not only aware of IMO2020 but also actively understand its implications to their business. Ship finance departments at banks such as DNB, Citibank and Société Generale have signed up to the Poseidon Principles, a set of advisories that tie banks and their shipping operations into environmental initiatives designed to reduce the emission levels found within global shipping. An extension of these principles to the goods and commodities carried by vessels financed by trade finance banks would also be a welcome initiative.
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