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Fuel costs are a critical component of overall transportation expense. Matt Balzola, vice president of go to market with Breakthrough, details the ways in which fuel is driving carrier decisions on pricing and service.
SCB: What is IMO 2020?
Balzola: The International Maritime Organization has set new standards for emissions for global ocean shipping. Starting in January, a very low-sulphur fuel type will replace today’s bunker fuel, IFO 380. It's going to reduce overall emissions. But it comes at a much higher price point, because there's so much more production required to get to that distillate. It's going to change, not just the fuel type, but how carriers procure it as well.
SCB: The alternative would be the use of so-called scrubbers within ships, and also natural gas. But I'm guessing that the low-sulphur option is probably the most practical at this point?
Balzola: Yes, it’s going to be the most readily available. Carriers have known for years that it was going to happen, but the acquisition of scrubbers is still a pretty intensive process, both in terms of installation and cost. So it's still a small percentage of the overall global ocean fleet. It's certainly an option, and some providers will have it — same with alternative fuels, such as natural gas. It’s just not as widely used right now.
SCB: Carriers are saying they’re not sure there's enough low-sulphur fuel available.
Balzola: Absolutely, and that's going to be one of the challenges. IFO 380 is found everywhere. With this higher distillate, availability of supply will be an issue, because it requires a much different infrastructure to produce it.
SCB: On another issue of concern to carriers, why is it important for shippers to take note of domestic regulatory changes such as higher taxes?
Balzola: There’s a lot of talk in the U.S. right now about the need for infrastructure. States are trying to right-size their infrastructure funding as well. In Michigan, there’s a proposal on the docket for a 45-cent-per-gallon diesel tax. If you're a shipper or manufacturer, it's going to cost more to get product to market. It becomes critical for companies to understand what those underlying cost components are.
SCB: Potentially, we could have 50 different tax regimes as you travel across the country.
SCB: Explain the concept of request for proposals (RFPs) from a full network standpoint. What does that mean to you, and is it time for the transportation industry to move away from it?
Balzola: I think so. You’ve got consumer goods producers and retailers looking for competitive rate for their lanes. Meanwhile, the carrier base is trying to figure out how to optimize its network within that freight flow. Every year it's kind of like 52-card pickup. You’ve got this relationship where both sides agree on the output, but the work that goes into it is the real challenge. It can be frustrating, and very time-intensive. There’s got to be better ways to approach the marketplace.
SCB: Do you think that because of the relatively low price of oil in the last few years, shippers have taken their eye off the ball with respect to the need for managing the fuel component of their transportation spend?
Balzola: Absolutely. A great example was in November of 2017, when California changed its diesel tax overnight. It went up considerably, and is now almost 80 cents a gallon. When a carrier's costs go up suddenly, and if the shipper's not paying attention to what's happening underneath, nobody loves having the conversation of, "I need to charge you more today for what I did yesterday." But it's crucial, because that's a real cost. And it eventually affects those of us who are buying product as well.
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