Carriers in no rush to make low-sulfur switch

Carriers in no rush to make low-sulfur switch

High-sulfur fuel oil prices at the major bunker hub of Rotterdam (above) have fallen sharply in the lead up to implementation of the IMO 2020 mandate. Photo credit: Shutterstock.com.

With high-sulfur fuel oil (HSFO) prices falling as much as 30 percent in recent weeks as the market prepares for IMO 2020, container lines are in no rush to begin burning more costly mandate-compliant fuels because there’s no incentive to do so until “the last minute,” analysts say.

Stocks of HSFO have dropped sharply as well, as refiners throttle back on production and suppliers in major ports clear tanks to make room for the very low-sulfur fuel oil (VLSFO) or marine gasoil (MGO) most carriers will use to meet the International Maritime Organization's low-sulfur rule. Starting Jan. 1, vessels are required to burn fuel with a maximum sulfur content of 0.5 percent, down from the existing cap of 3.5 percent.

“There’s no incentive for carriers to burn it yet,” Stephen Jew, director of global refining and marketing at IHS Markit, said of low-sulfur fuels. “They’re waiting for the very last minute.”

That lack of motivation has been even more apparent recently, with HSFO prices coming off sharply. Jew noted the fuel oil crack — the price difference between HSFO and Brent crude — had hit a two-year low of minus $20 per barrel in the bunkering hub of Rotterdam and is now minus $15 per barrel. “That’s the biggest move, price-wise,” in the market lately, he said.

“A lot of participants are minimizing their exposure [to HSFO] by making less and storing less,” Jew added. 

Analysts at Deutsche Bank pegged the HSFO price drop in Rotterdam at 30 percent over the past six weeks. “The price action is noteworthy as it comes at a time when refiners are trying to limit HSFO production ahead of IMO 2020, while demand is yet to be impacted, a dynamic that should be supportive of pricing,” they said in a research note.

Despite the sharp drop in HSFO prices, IHS Markit’s view of the Q1 spread between VLFSO and HSFO remains at $350 to $400 per metric ton, double what it was at mid-year. IHS Markit is the parent company of JOC.com.

Meeting the IMO mandate — whether by burning lower-sulfur fuel or installing scrubbers to clean emissions — will add $10 billion to $15 billion in additional costs to the container shipping industry, according to various estimates. 

Still no liquidity on VLSFO

Market action on VLSFO, meanwhile, remains almost non-existent. Other than some demand in Taiwan and in small Emission Control Area (ECA) zones in China, there’s been no notable trade for the fuel, Jew said.

“I haven’t seen any liquidity,” he said. “What I’m hearing is the liquidity is in very select markets.”

Jew said it will be October into November before terminals and bunker blenders begin switching over their supply chain logistics to handle VLSFO.

IHS Markit expects half of the global shipping fleet will burn MGO, with 30 percent turning to VLSFO and 20 percent using scrubbers or being non-compliant. MGO, a blend of distillates that make it similar to diesel fuel, will be a popular option for carriers because it’s a clean and compliant fuel that’s compatible with the combustion technology in ships. VLSFO, while compliant with IMO 2020, comes with questions about its compatibility in engines and availability at ports around the world.

“We think a lot of carriers will buy MGO because they’ll be conservative post-IMO 2020. No one wants to be the guinea pig,” Jew said. “MGO will have the highest demand to address the IMO, but that will wane over time.”

The industry is making its feelings clear on the VLSFO availability question. The heads of shipping trade associations BIMCO, the International Chamber of Shipping, INTERCARGO, and INTERTANKO, meeting in London this week, said there is “significant uncertainty” about the global availability of low-sulfur fuels.

“The industry has been working hard to ensure that we are ready for 1 January 2020, but we still have major concerns over safety and availability of compliant fuels,” Dimitris J. Fafalios, INTERCARGO’s chairman, said in a joint statement from the group. “We need all parties to fully play their part. It would not be acceptable to have even one ship drifting powerless at the mercy of the ocean.” 

Carriers are taking steps to secure supplies of compliant fuels. Maersk Line last week said it inked a deal with Koole Terminals to source VLSFO at the Port of Rotterdam, a move that will meet 5 to 10 percent of the annual fuel demand for the world’s largest container carrier. It’s the company’s second such tie-up following a deal earlier this year with United States refiner PBF. Chinese state-run line Cosco Shipping signed its own low-sulfur supply contract in March with Double Rich Limited, a subsidiary of China Marine Bunker. 

Scrubbers not a long-term solution?

Onboard scrubbers would allow a ship to continue burning the cheaper HSFO. IHS Markit expects approximately 2,000 ships will be using scrubbers as of Jan. 1, with another 600 to 700 ships actively being fitted for scrubber use.

David Kerstens, an equity analyst at Jefferies, believes scrubber use will cover over one-third of container capacity, but cautioned that may not be a long-term answer.

“Scrubbers are expected to cover up to 35 percent of container capacity, but will likely only be a temporary solution, in view of growing environmental concerns and uncertain fuel price developments,” he said in a research note this week. “In contrast, vessels with LNG-powered engines will likely grow in importance to reduce carbon footprint.”

Kerstens also warned IMO 2020 could ignite another “wave” of consolidation in the shipping industry.

“IMO 2020 could be the catalyst for the fourth wave of sector consolidation, eventually resulting in a container shipping oligopoly, as some of the smaller, financially distressed container liners are more at risk under IMO 2020,” he said.

Contact Kevin Saville at kevin.saville@ihsmarkit.com.