By Nicholas Brautlecht, with assistance from Alaric Nightingale in London
June 5 (Bloomberg) — The world’s biggest shipping companies will call on authorities to deploy drones in enforcing new pollution controls that may tempt competitors to use cheaper, dirtier fuel and undercut prices.
With new International Maritime Organization limits on sulfur emission set to cost the industry as much as $50 billion a year, A.P. Moeller Maersk A/S’s Maersk Line and about 10 other shipping companies later this month will form the Trident Alliance to fight for “robust enforcement” of the rules, which may include drones with emission sensors, according to Wallenius Wilhelmsen Logistic AS, a member of the coalition.
The rules will cut the level of sulfur permitted in shipping fuel by 90 percentage points in restricted Emission Control Areas, or ECAs, from 2015. Ships will be required to use exhaust filters or burn low-sulfur fuel, which is 50 percent more expensive than conventional fuel, in these zones, including the most-traveled trade routes. The big shipping companies say they’ll comply, while smaller firms may find it cheaper to pay fines, which currently are as much as 50,000 euros ($68,000) per violation in German waters.
“Fines today are, for most port states, below the potential savings if a company continues to use high-sulfur bunker fuel,” Peter Sand, chief shipping analyst at Bagsvaerd, Denmark-based BIMCO, the world’s biggest international shipping association, said in a May 23 interview in Hamburg.
To limit global warming, the European Union proposed the 28-nation bloc cut greenhouse gases by 40 percent by 2030, doubling the scale of the reduction it’s making by 2020. President Barack Obama on June 2 called on U.S. power plants to cut fossil fuel pollution by 30 percent by 2030 from 2005 levels, his most comprehensive climate-protection plan yet.
The IMO wants shipping companies to do their part to limit pollution, as about 90 percent of the world’s goods are carried by sea and the capacity of the global fleet has doubled since 2000. Almost all commercial vessels run on a low-quality fuel called bunker, a waste-product of the oil refining process that produces higher emissions than car or truck fuel.
From January, the IMO will force ships to use fuel with a maximum sulfur content of 0.1 percent, compared with the current 1 percent, in areas including the Baltic Sea, North Sea, the English Channel and coastal waters of North America. For the rest of the world’s waters, the limit will shrink to 0.5 percent in 2020 from the current 3.5 percent.
While Trident firms plan to pass higher fuel costs along to customers, those who stick with bunker fuel may undercut them. “The contrast between low fines and very high compliance cost creates a temptation to cut corners,” Roger Strevens, global head of environment for Oslo-based Wallenius Wilhelmsen, said by phone on May 16. “Only about one in 500 vessels is being inspected under the existing sulfur regulations.”
While bunker costs about $600 per metric ton in Rotterdam, Europe’s largest port, marine gas oil is about $300 more expensive, according to data compiled by Bloomberg. The 50 percent price gap will boost the industry’s total fuel bill by roughly $50 billion a year, Simon Bennett, spokesman at the International Chamber of Shipping in London, said by phone on May 20.
The Trident group says national authorities may use drones to spot vessels through the location signal they must broadcast, and determine their fuel type during a fly-over. Now the relatively few inspections are done when the ships are loading or unloading cargo at the ports, said Strevens.
“With conventional technologies, it’s difficult and expensive to determine what a vessel is burning while she is under way,” he said. “A drone with emissions sensors on board can overcome that.”
The sheer existence of unmanned aircrafts as a way of control will also make ship operators “a lot more cautious about taking shortcuts on compliance,” he said.
Germany plans to start monitoring compliance with land- based emission sensors on the coast and in ports, building on a research project called MeSMarT carried out at the gates of the Hamburg port, Germany’s largest harbor, according to the Federal Maritime and Hydrographic Agency BSH based there.
“Drones are still a matter of the future, but we support an initiative taken by Scandinavian countries and the Netherlands that call on the EU to foster the development of emission-monitoring tools such as land-based facilities, airplanes and drones,” Carolin Abromeit, head of shipping at BSH, said by phone on June 3.
The Danish Environmental Protection Agency awarded 1 million krone ($180,000) to a drone project to be tested this year, according to the country’s maritime authority DMA.
Drones can’t be the only way to step up controls, said Jon Risvig, director of business development for Aarhus, Denmark- based Unifeeder AS, a feeder vessel operator.
“Authorities need to come up with a range of enforcement measures, including testing the fuel and looking at companies’ invoices of what they are buying compared with what they actually are consuming,” he said by phone on June 3.
Costs may rise even further as the demand for marine gas oil is poised to almost triple to 17 million metric tons in 2015 from 6 million tons at the end of this year as the new limits take effect, according to Chih Chwen Heng, an analyst at London- based ACM Shipping, one of the world’s biggest ship-brokers.
Maersk Line, whose 584 vessels transport about 15 percent of the world’s containers, consumes about 650,000 metric tons of fuel, or 7 percent of its total consumption, in ECAs, Jacob Sterling, head of Copenhagen-based company’s sustainability unit, said in a May 15 e-mail.
It plans to pass on the expected $200 million in additional annual costs to clients via a new surcharge or adding it to existing fees for cargo transported in the ECAs, said Sterling. Hamburg-based Hapag-Lloyd AG and Hamburg Sud Group, Germany’s biggest liner companies, have similar plans. They expect extra costs of as much as $200 million and 40 million euros, respectively, representatives of the companies said.
Container carriers may find it difficult to pass on the cost as the oversupply of ships persists. Lenders such as Hamburg-based HSH Nordbank AG, the world’s largest ship- financier, don’t see a recovery before the end of 2015. This year, a 6 percent capacity gain in the global fleet will almost entirely absorb expected demand growth of 7 percent, according to a study by Deutsche FondsResearch published in May.
“The timing of the new rules couldn’t have been worse,” said Sand of BIMCO. While society may benefit from cleaner air, companies will definitely suffer, he said.
“Shipping is about economies of scale and cutting cost, but the new rules will drive up expenses as the container industry in particular still suffers from overcapacity,” he said.
Copyright 2014 Bloomberg.