Analysts: Years of price volatility after IMO low-sulfur switch

Analysts: Years of price volatility after IMO low-sulfur switch

The availability of low-sulfur fuel in ports around the world is uncertain with limited clarity of customer demand and logistics issues. Photo credit: Shutterstock.com.

Shippers frustrated over uncertainty surrounding the coming low-sulfur fuel mandate can count on one thing — there will be a significant and extended period of price volatility starting late in the fourth quarter when demand for the cleaner fuels rises sharply.

This is the view of shipping analysts and service providers as they try to see beyond Jan. 1, 2020, when the International Maritime Organization (IMO) will require commercial shipping to switch from fuel with 3.5 percent sulfur to 0.5 percent.

Tracy Vowel, vice president of business development for energy pricing specialist Argus Media, said their forecast shows low-sulfur fuel prices spiking sharply around January 2020 and declining slowly over the next few years.

She said product availability in each port was uncertain because of limited clarity of customer demand and logistics restrictions. “There may well be temporary supply gaps as the market adjusts to changes in demand, which can definitely increase price volatility,” Vowel said.

IHS Markit analysts predict a “scramble period” of up to a few years when a new equilibrium of supply and demand will be determined by refiners and shipowners. This could result in the price of low-sulfur bunker fuel hovering at about $680 per ton in 2020, up more than 30 percent compared with the current price of high-sulfur bunkers. JOC is a unit of IHS Markit.

Panalpina is also expecting an extended period of higher fuel prices and warned in a blog posting that customers should “expect choppy waves” in the months leading up to and stretching beyond the IMO2020 sulfur cap.

“There is a considerable potential for supply chain disruptions due to delays in fuel supply, denied port calls, retrofitting or downtime of ships,” the third-party logistics provider (3PL) noted.

This uncertainty will be reflected in the pricing of low-sulfur fuel, and there is consensus that the market is in for a steep increase. Panalpina expects the higher costs of using low-sulfur fuel will start to be passed on to shippers and forwarders as early as the end of the third quarter or the beginning of the fourth quarter.

“The regulators have laid out the rules, but the path for ship owners, operators and carriers to complying with the low sulfur limit remains rocky,” Panalpina said.

Carriers must have their vessels in compliance with the IMO rules by Jan. 1, 2020, but each line will determine its own schedule for doing so. For example, although it should take only one week to flush the heavy diesel out of a ship’s tanks, there is nothing to prevent a carrier from taking two weeks to do so to manage capacity on an oversupplied trade lane.

Supply fears

Sergey Ivanov, a director at the Sweden-based Marine Bunker Exchange, warned in BIMCO’s latest bulletin that the number of ports where low-sulfur fuel will be available at the beginning of 2020 will be limited, and the compliant fuel will be expensive for shipowners.

“Right now we see that gas oil trades at a premium of about $250 per ton more than heavy fuel oil, but the forward curve forecast is that it may rise to about $380 per ton at the beginning of 2020,” he said.

“Based on the average fuel consumption of 20 to 80 tons a day, a ship using the compliant distillate fuel faces an extra expense of about $7,000 to $20,000 per day. That is what we expect from the beginning of 2020.”

The cost to the container shipping industry of using low-sulfur fuel will be $10-15 billion a year, the carriers estimate. To offset these additional costs, several carriers have revised their Bunker Adjustment Factor surcharges. The size of the surcharges will be determined by the price of low-sulfur fuel.

Monique Giese, partner and global head of shipping at KPMG, said the uncertainty over price was a threat to business.

“We don’t know what the price will be. We know we need the fuel but there is no demand, which is a strange situation,” she said. “This is a threat and is what makes me nervous when I look at my clients. There is something coming up and we don’t know what it will look like.”

Vowel agreed, saying that with no demand for the cleaner fuel, it was difficult to assess the prices. She said using forecasts based on assumptions held today, Argus Media is predicting a spread of between $400 per ton between high and low sulfur fuel, “which is quite extreme.”

“We also expect there will be a global imbalance of high-sulfur fuel oil around the world, so ships may not be able to source high-sulfur fuel in every single port. There will be a lot of price volatility into 2020,” she said.

Nils Haupt, a spokesperson for Hapag-Lloyd, said the cost burden would depend on the trade lane, with the carrier expecting the additional cost of low-sulfur fuel to be between $80-100 per TEU on Asia-Europe.

Alexander Nowroth, managing partner of Lebenswerk Consulting, called the Hapag-Lloyd figure too conservative. “My feeling is that the shipping lines will try to make more of a margin. I think it will be an additional $300-500 per TEU,” he said.

Shippers could also see further deterioration of schedule reliability in the coming months as container lines remove some vessels from service to retrofit them with scrubbers to meet the IMO 2020 mandate. Installing a scrubber can take a vessel out of service for 30-40 days.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.