The 2020 sulphur cap numbers game

Implementing the 2020 sulphur cap (Credit: International Maritime Organisation)

It doesn’t really matter where you go or who you are hanging out with in maritime at the moment – the topic of conversation is the same. Everyone is talking about the 2020 sulphur cap and what it means for shipping.

After years of being given the cold shoulder, scrubbers are now this season’s ‘must-have’ accessory – installations were hovering around the 900 mark in August compared with 377 at the start of the year – while others, including Hapag-Lloyd, are still looking closely at liquefied natural gas as a fuel.

Those options aside, the consensus is that most owners will use compliant fuels, giving rise to all sorts of apprehension surrounding pricing, fuel availability, and preparations for the almighty switchover.

With the price of compliant fuel in January 2020 being “the best-kept secret in the industry”, leading Neapolitan shipowner Emanuele Grimaldi has described deducing the costs as being akin to forcing “shipowners to go to the betting shop”.

“Oil companies and refiners have a vested interest in this issue,” he told the recent XXII Euromed Convention. “It will be a simple issue of supply and demand, and if I were a refiner, I would slow down production to take advantage of this situation.”

So what is the position around supply? “The short answer is that supply won’t meet demand,” Martin Tallett, president of energy consultancy EnSys, told IHS Markit earlier this year. Tallett is the chief author of an unofficial study on fuel availability that was submitted to the International Maritime Organization to inform its decision on the sulphur cap in 2016. EnSys believes that the ‘switch volume’ – the amount of product that would need to change from high- to low-sulphur to enable 100% compliance to take place – stands at about 4 million barrels per day (bpd).

“We compared that with what we believe the refining industry can supply and we reckon it will be stretched to supply 3 out of those 4 million barrels,” he said.

This is a concern echoed by the International Energy Agency, which has estimated a switch volume of 3–4 million bpd to marine gasoil. In the context of a 28-million-bpd global diesel market, it warned that although the supply can be found by outbidding other users – adding to the total cost – producing more diesel overall would be challenging.

So with higher prices inevitable and question marks hanging over supply, what is the likely crunch point for the average shipowner in charge of a fleet of about five vessels?

For a stakeholder sitting on the other side of the ship operations fence, the answer to that question is access to credit.

“This is something that we feel will be a game-changer,” Jérôme Leprince-Ringuet, managing director of Total Marine Fuels Global Solutions, told IHS Markit. With the price of bunker fuel set to rise significantly, the worry is that companies with strained finances will struggle to secure credit from their suppliers, with the quantities they can purchase being reduced by higher overall unit prices.

Although there are ways to mitigate this, such as warranting payments, Leprince-Ringuet could not hide his concern. “Some [owners] may suffer and have to pay the price of that. It’s a question of cash. It’s a question of treasury. At the end of the day, it will put pressure on their finances,” he said.

So the message to shipowners is unequivocal: brace yourselves, your bankers, and your budgets.