Majority of vessels could see 2020 fuel bills double

Once refineries adapt to low-sulphur fuels
Once refineries adapt to low-sulphur fuels

With the International Maritime Organization’s (IMO’s) global sulphur cap set to force the vast majority of vessels away from heavy fuel oil (HFO), shipping markets have got used to seeing a range of price estimates for future bunker fuel.

Consultant Wood Mackenzie has estimated a 25% increase in bunker costs after the rule takes effect in 2020, while Wallenius Wilhelmsen predicts its bunker costs will rise by half. Maersk expects an extra USD2 billion to be added to its annual fuel bill.

Although the actual increase is impossible to predict, there is consensus that bunker prices will rise significantly.

For 2020–22, IHS Markit is predicting a ‘scramble’ period, during which refiners and shipowners struggle to find the components to create a sufficient supply of low-sulphur products. This will set the price of low-sulphur bunker fuel at about USD680/tonne in 2020. With the price of HFO currently at about USD400/tonne, this represents an increase of nearly 70% for the 27% of owners who are expected to go down this compliance route.

The price of marine gas oil (MGO), a middle distillate that is 0.1% sulphur and already being used inside emission control areas, is expected to jump to nearly USD800/tonne from its current level of about USD650/tonne.

Because many shipowners already have experience of using MGO, more than half of them are expected to switch to this fuel type in the initial stages following the implementation of the IMO rule, even though this will see their fuel bills double against current HFO prices. Demand for middle distillates will soar not only because of higher demand for MGO, but because it will be a component of low-sulphur fuels.

As demand for HFO falls dramatically, its price is forecast to slip below USD300/tonne, benefiting those 15% of vessels that have either opted for scrubbers or that will fall foul of the IMO regulation.

After the initial adoption period, prices are expected to adjust as refiners adapt to producing the fuels and the proliferation of scrubbers reduces the demand for MGO and low-sulphur fuels. IHS Markit believes that by 2025, they will have reduced to USD560/tonne and USD730/tonne, respectively. The same process will push the price of HFO up to about USD400/tonne.

“Our view is that the price of HSFO will move among various pricing bands during the first three years before a sizeable share of the large vessel fleet instals scrubbers and an onset of refining conversion capacity additions bring the market back to a new ‘norm,’” IHS Markit wrote in a recent report.

Yet these estimates are highly variable. They assume a compliance rate of roughly 85% of the global fleet, partly based on an IMO commitment to ban HFO being carried on vessels that do not have scrubbers fitted. Bunker fuel demand could also vary, depending on GDP growth, while lower crude values would cut the price of products.

“There is a lot of pricing uncertainty in general about the new low-sulphur blends because there is no standard. Different companies are going to release different blends and we don’t know how that is going to be priced,” IHS Markit oil market analyst Ronan Graham told IHS Markit.

Scrubber uptake data offer more certainty, given the time required and backlog to have the technology installed. So far, only about 1,000 vessels have adopted the technology, indicating demand for low-sulphur fuel oil and MGO will be firm.

Elizabeth Lindstad from Norwegian marine research organisation Sintef Ocean pointed out that the price differential between HFO and low-sulphur alternatives would increase with higher crude prices and narrow with lower ones. This is because, on top of the fixed costs required to convert crude into low-sulphur product compared with HFO, such as boiling, cracking, and heating at high temperatures, there is also an energy cost to the conversion.

“We need extra energy to convert crude into a low-sulphur fuel. It’s an energy demanding process. If we put in 100 kl energy, we might get out 85 kl,” Lindstad told IHS Markit. “If the oil price goes down to USD25/barrel again, then the diesel price becomes more competitive. But if it rises, then scrubbers will benefit.”

She noted that as we approach the implementation date of the sulphur cap, price estimates for low-sulphur fuels have generally fallen. “If we go back to 2016, we saw reports that the price differential would jump through the roof, but it was very much based on the assumption that diesel [MGO] would be the only alternative,” she explained.

Since then, refineries have launched several residual-based, low-sulphur bunker fuel blends that are expected to be priced significantly below that of MGO, which Lindstad believes is a response to the fact that scrubbers are an extremely cost-competitive option. “Without the scrubbers, the refineries could have produced diesel at a much higher price instead of providing low-sulphur fuels at a competitive price versus scrubber retrofits for vessels,” she said.

Refiners themselves have been tight-lipped about their pricing expectations, with several telling IHS Markit only that it will be dictated by market quotes, or refusing to discuss pricing all together. Watch this space.

The question for shipowners now is not only how large the increases will be, but how long before market forces push prices down in the new bunker environment.