The commercial effects of IMO’s regulation of the global sulphur cap in 2020 - A study on the procurement of deep-sea Ro-Ro at Volvo Cars

University essay from Göteborgs universitet/Graduate School

Abstract: The International Maritime Organization (IMO) has announced a new global sulphur content limit for fuels burnt on ships sailing in global waters. The implementation date for this regulation is on January the 1st, 2020 and entail a maximum sulphur content of 0.5%, in contrast to the current sulphur content limit in global waters of 3.5%. The regulation is expected to induce higher fuel costs for maritime transports on global waters and, thus higher rates for the users of these transports. While higher fuel costs are expected for using fuels with a sulphur content of 0.5%, there are other methods for a carrier to be compliant, which has other implications for the carrier and their customers. Swedish automotive manufacturer Volvo Car Corporation (VCC), being a consistent user of deep-sea Roll on-Roll off (Ro-Ro), can expect commercial implications as their suppliers of deep-sea Ro-Ro experience higher fuel costs. A central part of the relationship between ocean carriers and their customers is the Bunker Adjustment Factor (BAF), a tool used to adjust for fluctuating fuel prices. As fuel prices increase, hence the bunker surcharge, customers tend to put more emphasis on BAF to address transparency in regard to the extent a high surcharge is justified by the increased fuel costs. The purpose of this study is therefore to analyze the commercial effects of IMO’s regulation of the global sulphur content limit in 2020 on VCC procurement of deep-sea Ro-Ro, by investigating cost implications for suppliers of deep-sea Ro-Ro depending on compliance alternative, and consequently implications for VCC. The identified implications are considered in order to formulate recommendations for an adaptation of the currently used BAF model. In order to obtain the full picture of the focal area, an extensive literature review was performed. In addition, data collection through interviews with people at VCC, their suppliers of Ro-Ro transports as well as with Marine Benchmark and document analysis and secondary analysis was performed. Findings show that the predominant strategy applied by suppliers of deep-sea Ro-Ro are compliant fuels, claiming that the other option of installing a scrubber system to clean exhaust gases is not financially viable for the type of vessels used in deep-sea Ro-Ro, however this alternative were considered by a few of the suppliers. Furthermore, there are consensus that there will be repercussions on VCC for the increased fuel costs induced by this regulation, as carriers won’t be able to carry these costs themselves. Three fuel price scenarios based on future demand and availability for the fuels HSFO, VLSFO, and ULSFO were formulated. According to these scenarios, the fuel prices increase, regardless which scenario realized. The deep-sea Ro-Ro services utilized by VCC were investigated in terms of the supplier routes and vessels in the context of the fuel price scenarios to find cost implications. Using compliant fuels showed a fuel cost increase at 36%, 72% & 107%, while a scrubber investment would pay back in 0.3 - 2.1 years. Furthermore, recommended BAF adjustments are to adjust the bunker share on freight rate to 25% - 32%, while also including a figure for share of scrubbers and index prices for compliant fuels in the model.

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