HAMBURG, Germany — Container lines and analysts are signaling higher confidence in there being enough low-sulfur bunker fuel supply to meet the global mandate and willingness from cargo owners to pay higher surcharges. But concerns persist about the level of enforcement of the International Maritime Organization (IMO) mandate taking force three months after the Jan. 1 start of the rule.
The outlook for low-sulfur fuel supply is better than three months ago, and while early price indicators are wide, “they are there,” reflecting confidence that there will be enough of the new fuel type to power vessels, said Tracy Vowel, vice president of business development at price reporting agency Argus Media. While the weekend attack on a major Saudi Arabian oil production hub will limit high-sulfur bunker fuel and crude oil supply, she downplayed the impact on new low-sulfur fuel production.
“We are confident that the vessels will continue to sail first of January,” said Lars Mikael Jensen, head of North American trades at Maersk, which expects to be fully compliant with the IMO rule.
Speaking at the JOC Container Trade Europe Conference, Jensen on Tuesday said Maersk has “seen an understanding from the vast majority of customers” that they’ll need to pay higher fuel surcharges due to the mandate, which will cost the container shipping industry $10 billion to $15.7 billion more annually, according to various estimates. Under the mandate, container ship operators must reduce low-sulfur emissions to 0.5 percent from 3.5 percent, either by burning cleaner bunker fuel, implementing scrubbers, or powering vessels via liquefied natural gas (LNG).
Hapag-Lloyd CEO Rolf Habben Jansen said meeting the IMO rule “will be manageable,” both in terms of meeting the mandate and pushing the higher costs onto customers.
“The good and bad thing about IMO 2020 is that the increase in cost is very significant. The bad news is that it is very significant. The good news is that no one can afford to not pass it on.”
He added that most customers understand the need to pay higher fuel surcharges, with mechanisms to recoup higher operating costs within contracts. What happens in the contract market resonates in the spot market, “so I would expect those costs to be reflected in the spot market even if one can’t rule out that there will be some bumps.”
Habben Jansen expects there will be enough low-sulfur fuel available at major ports, but there might be shortages at smaller ports, forcing ships to burn more expensive marine gasoil (MGO).
While industry confidence in there being enough low-sulfur fuel has improved, worries remain. The heads of shipping trade associations BIMCO, the International Chamber of Shipping, INTERCARGO, and INTERTANKO, meeting in London earlier this month, said there is “significant uncertainty” about the global availability of low-sulfur fuels.
However, IHS Markit forecasts that about half of the demand for high-sulfur fuel will come from carriers violating the mandate, and the rest will support vessels with scrubbers. With that in mind, Maersk and other carriers are urging port states to enforce the mandate — something that’s easier to do after the IMO ruled that it was illegal for vessels to have high-sulfur fuel onboard unless they were using scrubbers.
Saudi attack could widen fuel price spreads
Meanwhile, analysts at Deutsche Bank say the Saudi attack — which took out 5 percent of global crude production — could widen fuel price spreads ahead of the IMO 2020 mandate due to the loss of light crudes needed to produce compliant fuels.
Deutsche, in a research note Monday, said the Saudi attack would have “important implications for IMO 2020” because the incident will primarily affect the kingdom’s production of its lighter crude grades, known as Arab Light and Arab Extra Light.
“These light crude grades generally produce more mid-distillates at the expense of residual output and thus are seeing increased demand on the back of IMO 2020 sulfur fuel regulations,” Deutsche said. “For this reason, lost production of light crude oil could make it more difficult for the global refining industry to meet the IMO 2020 demand shift while also driving a widening of fuel price spreads.”
The attack knocked out some 5.7 million barrels per day of Saudi crude output — half of the normal production from the OPEC kingpin and 5 percent of the world’s total. Brent crude futures surged almost 20 percent at Monday’s start of trade, its biggest jump ever. The front-month contract ended the day almost 15 percent higher.
Crude futures were giving up some of those gains Tuesday after Reuters reported that full restoration of the lost Saudi output could come in two to three weeks, rather than the months initially believed. The November Brent contract was down almost 7 percent at about $65 per barrel.
Tensions in the Middle East remain high despite the pullback in crude prices. The United States and Saudi Arabia blame Iran for the attack and the market is waiting to see what, if any, response will come from Washington and Riyadh.
Deutsche Bank noted the Saudi attack and resulting loss of light crudes are a positive development for carriers that have installed scrubbers due to any widening of the price spread between low-sulfur and high-sulfur fuels.
“A lightening of the global crude slate [US taking share from Iran, OPEC, Venezuela, and Canada] has been one of the biggest pushbacks to the positive IMO/scrubber outlook, and thus the loss of Saudi light barrels should help alleviate these concerns,” Deutsche said. “In addition, higher global oil prices will result in a higher fuel price spread on an absolute basis, which is what matters for companies investing in scrubbers.”
IHS Markit has forecast the first quarter 2020 spread between very low-sulfur fuel oil (VLSFO) and high-sulfur fuel oil (HSFO) at $350 to $400 per metric ton, double what it was at mid-year. IHS Markit is the parent company of JOC.com.
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.
IHS Markit also forecasts that approximately 2,000 ships will be using scrubbers as of Jan. 1, with another 600 to 700 ships actively being fitted for scrubber use.
