The shipping industry faces a hike in costs and operational headaches as a result of IMO 2020 regulations that will cap the sulfur content of marine fuels. At the same time, new streams of product demand will be created, potentially benefiting some shipowners.
The International Maritime Organization’s agreed limit of 0.5% sulfur content for marine fuel will come into effect next January 1 and its ramifications will span the shipping, bunkering, petroleum products and petrochemicals markets.
While bunker costs are expected to go up and prices to increase in volatility, higher demand for low sulfur fuel oil (LSFO) and Marine Gasoil (MGO) will impact demand and supply of products ranging from gasoline to naphtha as well as gasoil and diesel.
The new regulations could present an opportunity for the clean tanker market, as demand to move middle distillates and light ends into and between bunkering ports and refineries is expected to positively impact demand. This would in turn lead to higher freight rates for clean tankers, and higher revenue for shipowners, counteracting increased fuel costs. But in order to profit from the changes a fine balance will have to be achieved between the tonnage capacity of clean tankers and expected demand for clean petroleum products.
Troubled by over-tonnage
In shipping economics, supply is defined as the available capacity to transport cargo in terms of tonnage. In 1990, a capacity of 659 million deadweight tons was navigating the seas according to data from the United Nations Conference on Trade and Development (UNCTAD) and Lloyd’s register. That capacity increased by 191% in 2018 to 1,924 million tons. Ever since freight rates plunged following the global recession in 2008, over-tonnage has been a constant concern to the industry, fuelled by the emergence of shipbuilding yards in Asia. In 2017, ships built in China, the Republic of Korea and Japan accounted for 90.5% of global deliveries according to UNCTAD.
In January 2019, the clean tanker fleet size amounted to a total of 2,984 units, equivalent to 166.9 million deadweight tons. This is less than the previous five-year high reached in October 2016 of 2,948 units equivalent to 168.8 million deadweight tons but still represents a steady increase over the last two years, according to data obtained from Banchero Costa.
The same research shows 140 clean tanker units are expected to be delivered in 2019, after accounting for delivery slippages. This represents a 44% increase compared to the amount of total deliveries in 2018, or an estimated 6.2 million of additional tonnage on the supply side of the market. That raises the specter of an oversupplied market, which would lead to lower freight rates and a challenging environment for shipowners if not matched by an increase in demand for clean petroleum products.
Clean tankers for clean products
The market seems to think the demand will be there. According to the Marine Fuel Market Outlook from Alphatanker published in 2018, the extra volumes of clean low sulfur products that will be required following the start of the regulation in January 2020 far outstrip what is currently available, both in terms of quantities but also locations, accelerating clean tanker demand.
Many bunkering ports and refueling facilities will have to switch from their current stocks to greater supplies of MGO, LSFO and low sulphur blends. The regulation is expected to boost demand for clean tankers carrying MGO specifically, as it is a tried and tested low sulfur fuel blend, and owners are keen not to risk wrecking their engines as new blends come onto the market.
In addition the quantity of middle distillates shipped globally will increase, as import requirements are expected to rise over the coming years, especially in the Atlantic. It will become economically viable to transport ever-larger cargoes, potentially rivaling the cargo sizes seen in the crude market but difficult to obtain in the clean petroleum product market, such as Suezmax stems, representing close to a 1 million barrel capacity.
Recent trans-Atlantic time charter rates show the significance of the looming IMO 2020 regulation for the market. Time charter rates for a Medium Range tanker carrying a 37,000 mt cargo of clean petroleum products from the UK Continent to the US Atlantic Coast fell briefly to $2,000/day in July, 2018 before skyrocketing to $17,500/day in December, of the same year according to data from EA Gibson Shipbrokers’ Research. Diesel and gasoline demand is currently high, in turn creating demand for clean tankers. The trend for strong consumption of clean products is expected to continue into 2020.
Shipowners and operators are continuing to consider and adopt various strategies according to the UNCDA review of maritime transport published in 2018, such as installing scrubbers and switching to liquefied natural gas and other low sulphur fuels in order to ensure the correct following of the regulation and tackle future increased bunker costs and volatility. Nothing guarantees a corresponding increase in the revenues from charterers. But clean, coated tankers stand a better chance of riding along the same wave of increased product demand that IMO 2020 will generate.
A shipping hall-of-famer once said: “My grand–mother had a simple saying about the cycles, ’98 ships and 101 cargoes equals boom. 101 ships and 98 cargoes equals bust”. As long as the clean tanker market achieves the right balance between the increase in demand arising from IMO2020 and its future fleet size, the new regulation could allow it to ride the wave to a market boom.
Sea News, March 11