Regulation Ready – Market Commentary

[London, August 2018] – In just 16 months’ time, the industry will face one of the biggest shakeups in bunker standards since oil was used as fuel. To be able to comply with IMO 2020, the main options are to either fit scrubber technology onboard, burn costlier low sulphur fuels such as marine gasoil (MGO) or very-low-sulphur fuel oil (VLSFO) or burn alternative fuels such as LNG / Methanol. It is estimated that the shipping market will spend at least $250Bn in capex and opex over the next five years to comply with green regulations.

A recent survey by UBS says unit fuel cost is expected to rise by 68% by 2020 amid a below-trend trade compound annual growth rate of 3.2% over 2018-2022. It also claims shipowners will delay buying new ships until after 2020. But this coupled with increased scrapping and higher fleet utilisation could potentially support an estimated rise in freight rates between 9% and 24% on the switch.

Apart from the costs, if opting for the VLSFO route, the potential for bottlenecks in production and blending issues has many concerned that there won’t be enough VLSFO available to meet demand come 2020, with fears that some may try to cut corners. There has already been some controversy over bad bunkers, with at least 100 vessels claiming to have been hit by contaminated fuel. Bad bunkers have been supplied in such ports as the US Gulf, the Caribbean and SE Asia, most notably Singapore. Contaminated fuel has resulted in small mechanical failures right through to full engine breakdowns. Investigations have shown that although the “problem” fuel met with ISO8217:2005 specifications, increased blending with cutter stock to meet the limits has led to a rise in chemicals not typically found in the petroleum refining process and there are no global standards on how to deal with this.

Bunker suppliers are working hard to meet the deadline. Just this week Shell announced it was giving its customers the chance to test its new 2020 complaint fuel, while Maersk and Vopak have come together to launch a VLSFO bunkering facility in Rotterdam.

However, the impending stricter regulations has shone the spotlight on scrubbers. Considering the changing market conditions, once dismissed as being too expensive, owners/operators have been reassessing their feasibility, especially for larger ships. A wide-enough spread between high and low sulphur fuel would justify the capital cost of installing a scrubber over burning more expensive bunkers (see Special Report: IMO 2020 – pg 12).

Another study by FGE has said more that 2,100 vessels are now expected to install a scrubber by 2020, up from previous estimates of 1,500 ships. What with larger vessels looking at this option, they predict demand for HSFO could increase from previous estimates of 300,000-400,000 bpd to 800,000 bpd by 2020. Therefore, demand for HSFO is likely to see a smaller drop than previously expected.

Several Owners have announced their scrubber investment programs, with Norden spending $41M on its owned fleet (2 newbuilds + 16 retrofits); Dorian to retrofit 7 for $20M; WWL will invest $140M retrofitting 20 ships to name a few. We have witnessed capex prices starting to come down, with the average price for a scrubber system currently around the $2M to $4M mark, but we have heard some costing as little as $1.2M or as high as $6M-$7M as WWL can attest to. The cost benefit has even started to appeal to smaller vessels which were previously thought as too small to fit, with Koyo fitting systems to their 12,000dwt newbuilds. We have even heard of some bunker suppliers offering these systems for free against volume commitments from Owners. Although Owners still has time to make their decision, 16 months will go quicker than you think. [August 2018, SPI Marine]