Don’t let new bunker regulations leave you high and dry

Ship owners have been through stormy waters of late – and things could get a lot choppier out there thanks to a global push to clean up fuel.

While Europe and the US have been controlling emissions in their coastal waters for the past decade, the International Maritime Organization is about to extend regulation to cover the entire world. The new rules will mean around 2 – 2.5 million bpd of high-sulfur oil converting to low sulfur. That’s a big shift. It equates to almost 180 million tpy – 70% of the fuel used by the shipping industry – switching from 3.5% sulfur to below 0.5%. Compliance is likely to cost the shipping industry US$60 billion, according to consultants at Wood Mackenzie Ltd.

Ship owners have three options to respond:

• Keep buying higher sulfur fuel but invest in mini refineries, or scrubbers, to clean it up.
• Buy new ultra-low sulfur fuels with less than 0.5% sulfur.
• Switch to better quality and more expensive generic gas oil distillates at US$200/t.

Even though the new rules will not take effect until 2020, they have already caused price shocks. When the IMO announced its decision last October, the cost of high sulfur fuel oil dropped by US$50/t. But with buyers having the option to clean up the sulfur content, the case against the fuel no longer seems as obvious given the potential purchases for vessels using scrubbers by shipping companies such as Carnival Corporation.

With each ship owner taking their own route to purchasing cleaner fuels, the biggest risk is that suppliers will suddenly be out of sync – that they will not have the favoured products available in specific geographies where ships need to load. With such shortages comes the danger of resultant price spikes, hitting the consumer and global commerce through higher costs to ship goods.

The risk of a price shock has been exacerbated by the way in which the regulation is being introduced. When sulfur was banned from petrol in motor vehicles, suppliers were simply informed that they could not sell high-sulfur petrol or diesel from a set date. But the IMO has done the opposite with the shipping industry, putting the onus on the consumer. This implies that it is the ship operator who needs to find a solution.

Ship owners face additional costs whichever of the three options they choose, and with fuel accounting for 50% of typical overheads, it is important to start modelling the best plan now. The right choices depend on the fleets, routes and capacity for capital expenditure for each ship owner.

The first option, of cleaning up the fuel, for example, carries a capital cost of around US$3 million to build a scrubber. For the second option, make sure the new ultra-low sulfur fuels are available on routes that your ships ply. If it is option three, will operators be ready to pay an extra US$200 per tonne of fuel?

To work out which option is best, here are four tests:

• Type of ship: cruise ships or ferries, for example, may plump for cleaning their own fuel because they are always close to ports and so can install scrubbers.
• Age of fleet: the newer the ship, the more appealing scrubbers become because the payback period is longer.
• The voyage: even with the new global regulations, there will be different requirements for different regions. While 0.5% sulfur is the limit in high seas, 0.1% is required at port.
• The ports: the top six ports for bunkering are Singapore, Rotterdam, Houston, New York, Fujairah and Panama. Ships frequenting these ports have the widest choice of fuel. Those operating outside of these ports might switch to the more expensive gasoil because it is readily available around the world.

Whichever choice ship owners make, they will need to stick with that decision for years to come. It is too expensive to switch to ultra-low sulfur fuel, for example, simply to shift again a few months later.

While most ship owners probably favour option two or three right now, they are waiting to see which will become the cheapest fuel closer to 2020. But this is a fool’s errand. When everyone chooses what appears to be the cheapest option at the end of 2019, the sudden demand will cause the price to soar in 2020. The cheapest option will soon become very expensive.

With this in mind, the safest course is to hedge – putting some ships on one option and others on another. Even better would be for ship owners and their suppliers to have a strategic conversation, and collectively work out the best arrangement. Sadly, such industry maturity seems a distant prospect. Most ship owners will instead simply try to beat down their suppliers on price. Another worrying sign is that, at the CEO level, this entire issue appears barely to have registered; most are leaving it to the ‘experts’ on the trading desks, with little input from senior management focused on overall corporate strategy.

It’s time for the industry to take stock to protect its future. Dry bulk ship owners have been in a bad market. The industry runs on iron ore and coal shipments – accounting for 70% of cargoes. As China’s demand for steel and other commodities has fallen with the slowing of its economy, freight rates have crashed, with last year being the worst in three decades. Companies have been bleeding money. Signs of recovery are only just emerging this year.

Each ship owner has two ways to improve their lot: increase revenues or reduce costs. Boosting revenues in a market that’s bleeding is a tough order; the only variable ship owners can truly control is costs. Fuel is among the biggest costs, and could suddenly become a much larger component. In a lean market, there needs to be a laser focus on expenses.

Management also needs to be aware of the added complexity this adds to the bunker buying function. In an ever changing, increasingly regulated market, bunker buyers need to ‘up-level’ from ‘price takers’ into a strategic energy procurement function. This requires a full review of the skills, processes and systems used by the bunkering department. Technology combined with embedded best industry practices and decision-making systems is the fastest and most effective way of delivering savings.

Like voyages, big decisions on fuel require planning. Don’t sleep walk into the cliff edge or you will die.

About the author

Master Mariner Alok Sharma is the Head of Global Sales at Inatech, a Glencore company that provides physical oil trading and bunker fuel management solutions for the shipping industry. Shiptech is the market leading system for bunker fuel procurement with a combined fleet from various customers of 1500 vessels using it daily.

For more information: www.shiptech.com

This piece was originally published in Dry Bulk Summer 2017. To receive your free copy, click here.