The potential effect and influence of sulfur restriction order on trade financing

- Dec 10, 2019-

Shipping is a key component of trade financing. Any factors that affect the regulation and ship financial status, the ownership structure of the ship, and how the ship operates need the attention and evaluation of traders, banks and financial institutions.

One such factor is the IMO 2020 sulfur limit order, which came into effect on January 1, 2020. The International Maritime Organization (IMO) has issued the IMO 2020 policy to deal with the impact of shipping on the environment, especially the impact of marine fuel oil. At present, the main fuel oil used by ships is high sulfur fuel oil (hsfo), with sulfur content of 3.5%; and IMO 2020 sulfur limit order requires that the sulfur content of marine fuel oil on-line is 0.5%.

The new regulation aims to reduce emissions from the global shipping industry and will affect 600000 ships currently in operation. Therefore, the ship must comply with this regulation, and the current feasible plans include:

Full use of low sulfur fuel oil (LSFO);

Use alternative energy sources such as liquefied natural gas (LNG);

Install "desulfurizer" as exhaust gas cleaning system to reduce sulfur emission of high sulfur fuel oil.

Switching from high sulfur fuel to low sulfur fuel is the most direct choice. Fuel such as marine gasoline (MgO) has low sulfur content, but is much more expensive than high sulfur fuel. However, due to the requirements of the emission control area (ECA), many ships operating in northwest Europe and North America are already using marine gasoline.

But the other two options, i.e. installation of desulfurization tower and use of LNG fuel, are more complicated and more expensive. For the ships in service, the installation of desulfurization tower is naturally installed after the ship is built and according to the specific situation. At present, only 2% of the global fleet has installed desulfurization tower. LNG fuel will also bring problems due to the technical characteristics of ships, which is generally considered unlikely to be widely used as fuel.

Therefore, no matter which way shipowners and operators choose, there will be situations where they will do nothing and they will not be ready by January 2020. Now, it is impossible for all ships to meet the requirements of the new regulations.

The implementation responsibility of IMO 2020 sulfur limit order does not belong to IMO, but belongs to port state control and flag state. These authorities will use fuel delivery records, ship documents, fuel samples to determine whether there is a violation.

If the ship violates the IMO 2020 sulfur restriction order, it may be subject to high fines, detention, or even imprisonment.

In one case, in August 2019, the U.S. Department of justice fined a tanker owner and operator $3 million for failing to comply with fuel pollution regulations. The sulfur content of the fuel oil used by the involved vessel "ocean Prince" (IMO No. 9268291) exceeds the upper limit of 0.1% specified by the United States Caribbean emission control area. The ship stayed in the port for a long time for fuel inspection and the crew were interrogated. This resulted in a significant delay in the ship's schedule - it arrived at the end of July and did not leave in mid September.

Obviously, there are risks and costs for shipowners and charterers, so what are the impacts on the banks and financial institutions that provide financing for the transported goods?

Recently, IMO issued a series of guidelines on "consistent implementation of the 0.5% sulfur limit". These guidelines explain how ships are obliged and capable of being inspected, and also point out that efforts should be made to avoid detention and delay due to the implementation of IMO sulfur restriction orders. Although this is what IMO hopes, the delay is inevitable. The time of testing and checking fuel oil will affect the time of berthing, which will have a chain reaction and increase the waiting time of ships to enter the port.

In addition, vessels in violation of the regulations will not be allowed to sail until the non-conforming fuel oil is discharged. This will result in a loss of cost and time, as ships generally only refuel, not unload.

Therefore, the cost of violation is very high for the participants. For banks, if they finance the goods transported by ships that do not comply with the IMO 2020 sulfur limitation order, they may encounter delivery delay and payment delay, and if they encounter the worst situation such as "ocean Prince", the ships, goods and crew will be detained by the port authorities.

Therefore, the bank's trade finance team should not only understand the IMO 2020 sulfur limit order, but also actively understand the impact on their business. Banks such as DNB, Citibank and soci é t é Generale have all signed up to the Poseidon principles. This is a series of proposals to link banks and their shipping businesses with the emission reduction measures established by the global shipping industry. In the future, the rule should be extended to cover cargo shipped by ships financed by trade finance banks.