Export freight rates for GCC producers could increase by as much as 10% due to the IMO’s sulphur cap on fuel content, says Dr. Abdulwahab Al Sadoun, secretary general, GPCA.
The International Maritime Organization (IMO) bunker fuel regulation, capping sulphur content of marine bunker fuel at 0.5% versus the current 3.5% is going to have a significant impact on oil supply chains in the Middle East, says Dr. Abdulwahab Al Sadoun, secretary general, Gulf Petrochemicals and Chemicals Association (GPCA).
“With no delays expected for the implementation of the new International Maritime Organization (IMO) bunker fuel regulation, from Jan.1, 2020, the new regulation is expected to dramatically alter the global supply chain landscape,” he wrote in a comment piece for the Saudi Gazette.
Compliance with the new fuel specification will involve significant costs for the refining and shipping industries, while petrochemical producers could face higher freight rates and changes in feedstock pricing, according to Al Sadoun.
“The regional chemical industry in the GCC (and globally) will feel the impact on two major fronts: firstly, in the form of higher freight rates related to the transportation costs of its products; and secondly, in its feedstock pricing,” he says.
Because all six GCC states are signatories to the IMO and because the energy sector is one of the most heavily export-oriented industries in the region, the regional chemical industry has one of the longest and most costly supply chains.
Around 83% of chemical output in the region is ultimately shipped to over 100 countries worldwide.
“Transportation costs are estimated to account for 5% of total chemical sales, warehousing for 3.5%, and additional cost related to supply chain planning and administration accounts for 1.5%, thus, overall supply chain costs take up 10% of total chemical sales,” he says.
To measure the impact from higher freight rates on chemical supply chain costs, Al Sadoun takes the implementation of mandatory low-sulphur fuel in 2015 at the Emission Control Areas (ECA) comprising northern Europe and the US.
Maersk Line introduced low sulfur surcharges ranging between USD 15/teu and USD 80/teu, depending on the route.
“If we take the same scenario for the new IMO regulations, export freight rates for GCC producers could increase by as much as 10% reaching US $1,688 on average.”
As a result, GPCA estimates that transportation cost will increase its share in total chemicals sales to 6%, up from 5% previously, while total chemical supply chain costs will increase to 11% from 10% currently.
Given the scale of the change, the entire oil value chain is likely to see high volatility during 2020.