Shipowners with scrubber-equipped vessels will need to lock in long-term HSFO supplies, and hedge if needed, amid concerns about consistent availability and quality when the International Maritime Organization’s global sulfur limit rule for marine fuels kicks in from 2020, Adrian Tolson, a bunker industry veteran and senior partner at 2020 Marine Energy, said.
The IMO’s global sulfur limit for marine fuels will cap global sulfur content in marine fuels at 0.5% from January 1, 2020, down from 3.5% currently. This applies outside the designated emission control areas where the limit is already 0.1%.
“I think the scrubber argument is still very positive and if I was able to lock in future good quality HSFO supply and had a big enough ship trading in international [no Emission Control Area] waters, then I would install a scrubber as soon as possible,” Tolson told S&P Global Platts in an interview. “I do not think demand for HSFO will suffer due to wash water issues,” he added.
There have been recent announcements by some ports to ban wash water discharge from open-loop scrubbers in their waters.
Tolson said that he was slightly worried about the industry underestimating the costs of buying HSFO bunkers post 2020.
“We know they will not be available at all ports….but we also need to assume that the wholesale to retail margin will be much higher post 2020. Maintaining segregated systems [tanks and barges] and carrying inventory always comes at a cost and given the relatively small demand, there will be an increase in HSFO margins,” Tolson said.
Suppliers at small ports will also likely be in a monopoly position, which could potentially drive up prices.
“We still live in a situation where we have no certainty as to overall demand of post 2020 fuels and the location of this demand,” Tolson said. Because of this, there could be a massive oversupply or undersupply of certain fuel choices, both globally and in specific ports or regions, he said.
“One area I see potential problems is with refiners who are happily committed by producing VLSFO and have a price target versus diesel in mind,” Tolson said.
“Another supplier with a 0.5% fuel oil comes along having a different and cheaper price idea and this makes the first supplier totally uncompetitive. As a result, his demand disappears and he cancels future VSLFO supply plans,” he added.
The uncertainty around future market fundamentals is also being reflected in the way prices will move.
“From 2020 onwards this [MGO-HSFO price] spread is really one of the most interesting questions,” Tolson said.
“I think [closer to 2020] it [MGO-HSGO price differential] will remain in the $150-$250/mt range as it has for the last few months. HSFO for the front months has been pretty strong due to limited availability. At some point HSFO will start to drop and the gap with MGO will open up. I am guessing by the end of Q4 we will be seeing numbers close to $350 or even $400/mt,” Tolson said.
Bunker quality issues will continue to dominate the 2020 landscape, Tolson said.
Many owners are responsible and will be very cautious in managing fuels on the vessel so that any compatibility issues between fuels do not arise and cause operational issues, Tolson said. However, other owners may not be so diligent and this will create issues, he said.
“We should not be ignoring issues with the potential for problems with MGO on vessels. Higher volumes may produce some unwise blends of distillates and we will likely see these quality issues increase,” Tolson said.
In addition, HSFO problems will not go away and with less demand in the market, it might be that refiners/suppliers are less diligent with the quality of these fuels than in the past, he said.
So, it becomes imperative to know what you are buying and utilize quality testing and sound fuel management policies, he added.
Enforcement of the 2020 rule also remains one of the biggest challenges, Tolson said.
“Will it be there and will it be strong enough to get high compliance? I think it will, but I see it as a bit like a patchwork blanket sewn together. I hope there are not too many holes in the blanket,” Tolson said.
Sea News, March 25