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USSA Position Paper

Beverly Altimore - Monday, April 08, 2013

Low Sulfur Charge

One way that the Ocean Carrier segment of the shipping industry tries to keep customers happy with low rates while maintaining their own profitability involves finding new ways to enhance their revenues without asking their customers for a rate increase.  They can sometimes accomplish this by applying surcharges to the base ocean freight rate, which promotes the idea of transparency in rating.  Carriers are recently approaching customers with a new surcharge request - the Low Sulfur Charge (LSC).  Carriers advise that the surcharge is applicable due to mandatory international regulations that Carriers burn low sulfur fuels (LSF) when within a certain distance of specified coast lines.  USSA has studied this issue carefully, and while we agree that there are regulations in place requiring the burning of special fuels, we contend that the Carriers unfairly assess this charge against certain segments of the U.S. shipping trade, which then causes those shippers to pay an unfairly high amount.


The International Maritime Organization (IMO), a United Nations agency concerned with maritime safety, security, and pollution-prevention issues, first adopted standards for pollutants in October 2008.  Those standards can be found in the International Convention on the Prevention of Pollution from Ships (MARPOL) Annex VI.  That document deems certain coastal areas as Emission Control Areas (ECA), which are special protection areas that qualify for more stringent controls on sulphur oxide (SOx) emissions.  Such areas are requested to be so designated by the governing nations and status as an ECA is achieved through a detailed application process. Additional areas will likely be added over time, but the current ECAs include:

Area

Effective date

Baltic Sea

19 May 2006

North Sea

22 November 2007

North America

1 August 2012

U.S. Caribbean

1 January 2014


Once designated as an ECA, MARPOL assists in setting restrictions on the sulphur content of the fuel that is burned within those areas.  That level can and will fluctuate over time, as necessary, to achieve the environmental standards of each area.  Currently, the requirement is that vessels within the ECA must burn fuel with maximum 1% sulphur content.

The area encompassed by an ECA varies depending on the location.  The current restriction covers some 200 miles from the coast of U.S. and Canada, but the Baltic/North Sea area covers everything within certain geographical lines.
  


Trying to get a fix on the exact cost of LSF to justify the Carriers’ statement that they are burdened with an additional cost to their operations because of international regulations is difficult.  Although several organizations have developed bunker fuel cost tables to comply with the need to track the price of bunker fuels, LSF is still a new requirement and there are neither adequate tracking systems easily available nor are there precise burn rates.  The TSA/WTSA have established a tracking mechanism for the cost of LSF on their website, but keep in mind that this is information provided by an organization supporting the Carrier community and thus is probably not entirely unbiased in their calculations.

The discrepancy with the LSC being requested by Carriers stems from the fact that this charge is not being evenly and fairly assessed across all users.  General cargoes to and from the U.S. are assessed the LSC by tariff quantum (or possibly special contract rates), but certain low-rated commodities aboard the ship do not pay the LSC charge.  Waste paper and forest products, for example, do not pay LSC.  It can be argued by Carriers that the rates for those products already include the LSC, but the rate levels for those commodities have not recently increased by the quantum of the tariff LSC.  

Additionally, the LSC does not appear on trade lanes not touching the U.S., even though they are destined to areas (like the Baltic and North Sea) that do require the use of low-sulphur fuel.  Likewise, importers from Central and South America do not pay the LSC, either, even though the vessels carrying those goods have the same LSF cost factors as vessels coming from Asia and Europe.

These peculiarities in the application of the LSC should give pause to importers and exporters in the U.S. east-west trade lanes, who should be asking their Carriers not only why they need to pay extra to compensate for this special fuel requirement, but also why they are subsidizing other commodity sectors and also subsidizing shippers in other trades that do not pay it.  

An additional cost to the ship operator is a valid reason to pass on that cost to the user.  It is acknowledged that the end user ultimately always pays the cost of doing business.  With that being said, though, all shippers should pay the cost, not just specific categories of shippers that are somehow considered to be ‘less cost-conscious’.  Cargo interests in the U.S. that pay the LSC are apparently subsidizing not only other U.S. shippers, but shippers to/from Central and South America and importers in Europe, as well.  We contend that if the LSC is applicable, it should be applied equally and fairly across all shipping segments, both in the U.S. and in Europe.  If this additional cost was truly applied fairly and equally across all users, the cost of the charge would go down dramatically for every container moved.   Thus, we ask all Carriers to re-evaluate their LSC – if they intend to assess this charge, it should be done on all applicable trade lanes and on all cargoes moving on the vessel.  Doing so will result in a sizeable reduction of the current requested LSC.  A select group of users in one location should not bear the full cost of this regulation for world-wide operations.






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