IMO 2020 : The Impact On Iron Ore Prices

68.4% of iron ore produced in 2018 was shipped for export, with China accounting for 69.1% of all seaborne iron ore imports. Freight costs to China in 2017 and 2018 are estimated to have accounted for 27% and 31% respectively of the total cash costs of iron ore globally. The IMO 2020 regulations will cause a significant shift in bunker fuel demand as shippers seek compliant fuels . Because of the changes in fuel demand, shippers who use MGO or ULSFO will see an increase in the costs of their bunker fuel as a significant price differential emerges between HSFO and MGO/ULSFO. A $100/t rise i n bunker fuel costs, adds an additional $0.31/t and $0.97/t to the cost of freight to China from Australia and Brazil respectively. At 2018 average cash costs, for a miner this represents: - In Brazil, 5.4% of 2018 freight costs and 2.7% of overall costs . - In Australia, 3.5% of 2018 freight costs and 1.1% of overall costs . The change to bunker fuel costs due to IMO 2020 will vary, with it reliant on the shipping contract agreed, the ship’s size & speed and the exact change in fuel price. Brazilian producers are more at risk to rising fuel prices than their Australian counterparts. Vale accounts for 91% of Brazil’s 394 Mt annual seaborne exports . I n recent years, the company has altered its shipping strategy , and recent COAs signed state that shipments must be made by LNG ready vess els and equipped with scrubbers . This highlight s their attempts to mitigate the impact of the IMO 2020 regulation. I t is unlikely that any additional costs incurred from rising bunker fuel prices will be passed onto steel mills through higher end prices. Instead, the additional costs are likely to be absorbed by miners due to the current oversupply in the iron ore market and robust margins of producers.