Carrier hesitation over the route to low-sulfur fuel compliance means less than half of the ships requiring retrofitted scrubbers will have the exhaust systems in place by the Jan. 1, 2020, deadline.
Container shipping lines have been caught in what IHS Markit energy analyst Spencer Welch describes as a classic “prisoner’s dilemma.” His reasoning is that if all carriers invested in scrubber technology, there would be no bunker fuel market disruption and no return on that investment. Alternatively, if only a few carriers invest in scrubbers, the market would experience a huge shortage of low-sulfur fuel oil, a large excess of high-sulfur fuel oil, and significant price disruption, along with a very attractive payback — i.e., cheap, plentiful higher-sulfur bunker fuel — for the few that did invest.
“Ironically, this dilemma has effectively stalled investments,” Welch said. “Only since mid-2018 have scrubber investments started to increase. We now expect only around 2,000 of the world's 120,000 ships to be fitted with scrubbers by the start of 2020.”
The eventual price of low-sulfur bunker fuel — and the extent to which scrubbers are used to take advantage of remaining high-sulfur supplies — will have an immense impact on ocean transportation costs for shippers, who are expected to foot the bill for the $10-15 billion, depending on various estimates, in additional annual fuel costs carriers will incur.
Drewry expects low-sulfur fuel to cost 55 percent to 65 percent more than the bunker fuel most commonly used to power ships. The average cost of IFO 380 — the most commonly used marine bunker fuel — stood at $428.54 per metric ton in March, up 17 percent from the same month a year ago, while low-sulfur fuel oil prices averaged $557.40 per metric ton.
The curse of optionality
According to maritime researcher Alphaliner, a little more than 50 container ships have had scrubbers installed, or are undergoing retrofitting, so far. The analyst said that given the large number of ships requiring retrofitting and the limited number of slots available at scrubber retrofit yards, less than half of them will be fitted before the new global sulfur cap of 0.5 percent for marine fuel oil comes into effect.
In Alphaliner’s survey of ships identified for scrubber retrofits, 16 ships ranging in size from 2,900 TEU to 18,000 TEU are believed to be currently undergoing retrofit work at various Asian yards. The total number of scrubbers ordered so far is estimated to have exceeded 700 units, with about 200 units to be fitted on newbuildings and 500 units expected to be retrofitted on existing ships.
The International Maritime Organization (IMO) in October 2016 announced plans to reduce its global bunker fuel specification from 3.5 percent to 0.5 percent sulfur for maritime bunker fuel, effective January 2020. Following the announcement, Welch said IHS Markit predicted not only that there would be insufficient time for the shipping and refining industries to prepare for the change, but that significant disruption to oil markets was likely.
He explained that three years to prepare for the lower-sulfur fuel was insufficient because of the optionality involved. For most specification changes, it’s the supplier — usually the refinery — that needs to make the change, he said.
“However, IMO 2020 is different. Either the supplier can make the change or the buyer can continue to buy the off-specification fuel, as long as the buyer installs a scrubber on each ship to maintain atmospheric emissions at the same levels as low-sulfur fuel,” he said.
The recent acceleration in scrubber installations may also have an impact on shippers, who could see further deterioration of schedule reliability in the coming months as the vessels are pulled from services for retrofitting.
On-time performance by carriers on the Asia-US trades plunged to new lows in the first two months of the year, with the all-water East Coast lane recording its sixth straight month of record lows in schedule reliability, according to the latest data from SeaIntelligence Consulting. The maritime consultancy said 2018 was the worst year for container line schedule reliability since the Denmark-headquartered firm started measuring the data in 2012, with eight out of 12 months registering record lows.
This uncertainty with regard to demand for low-sulfur fuel is also clouding supply and pricing estimates. Energy majors ExxonMobil, BP, Shell, and Chevron all have made assurances via statements or in media reports that low-sulfur fuel will be available later this year in container shipping ports around the world, and they have expressed confidence that supply will be sufficient. However, the demand will be enormous, with BP expecting over 90 percent of the global bunker market to comply with the 2020 sulfur cap.
In his analysis, Welch said quarterly average pricing of low-sulfur fuel was important, as the market impact could be distinctly different from the first quarter of 2020 to the fourth quarter.
From 2010 to 2018, the “USGC [US Gulf Coast] product light-heavy differential,” the price difference between high- and low-sulfur fuel, “ ... averaged around $22 per barrel (bbl),” he said. “In our base case, we expect this gap to widen to almost $50/bbl on an annual average basis in 2020. On a quarterly basis, this differential might hit $60/bbl.
“In our base case, the peak of the IMO transition market impact occurs in the second quarter of 2020,” Welch added. “Although the new specification goes live on Jan. 1, 2020, the carriage ban (legislation preventing ships from carrying [high-sulfur fuel oil] in their fuel tanks unless they have a scrubber) does not take effect until the end of the first quarter 2020. We believe this ban will be instrumental in raising compliance rates.”