– choose the right specs
By 1 January 2020, the International Maritime Organization (IMO) will impose the 0.5 % sulphur emission cap on the maritime sector globally.
Even though most countries agree to the benefits of capping the sulphur emissions globally, these new regulations pose operational challenges to the international shipping industry. Most operators seem to postpone decisions about how to comply with this until the very last minute. Given the many uncertainties, this might seem be the best approach. However, the date is approaching rapidly, hence, preparing your operation and company for the inevitable, becomes more and more urgent.
Much has been said and more will be said, but at Malik Supply A/S and Nordic Marine Oil A/S we see the following trends at this stage:
Few people are investing in scrubbers. Mostly, because they have concerns about the overall return of investment as scrubbers are a costly investment based on the availability of HSFO and the long-term discount from HSFO to distillates.
Needless to say, the availability of HSFO is crucial to the scrubber, but also the discount to the distillate market will ultimately render the ship’s operation competitive or not vis-à-vis distillate burning ships. Additionally, the policing and penalties for exceeding the sulphur cap will be of value to vessels with scrubbers as this should safeguard the initial scrubber investment.
We expect the following trends supporting scrubber technology veins implemented:
The expected lack of demand in HSFO after 2020 will support the price gap from HSFO to distillates which again supports the return on investments in scrubbers.
- The scrubber solution offers a good method for disposing of sulphur which is an inherent part of any crude oil and makes up a global problem.
- Fines have been issued. Thirteen countries have officially declared fine levels ranging up to 6m euros.
- Investors and banks will eventually find comfort in scrubbers as a viable solution and thus be more inclined to support this investment.
We believe that scrubbers will provide a sulphur treatment solution and thus offer commercial vessels SECA compliance. It is the solution that we believe will be used more widely after 1 January 2020 when the HSFO output and availability stabilizes.
This solution seems to be the method chosen by most operators at this stage. However, due to the abovementioned uncertainty, it seems to be more of a “fall-back” position than a long-term strategical decision. This appears to be the “no-risk” approach. Through a bunker adjustment approach, the cost is expected to be passed onto the end user.
However, switching to distillates is not as easy as it may sound. Firstly, owners need to check if the vessel’s main engine can burn low-viscosity products and is correctly lubricated to burn these products. Secondly, charter parties might stipulate a viscosity spread or raise other issues that do not include distillates specifications. Challenges will be similar to the switch to 1% HSFO in 2010.
Also, other shipping-related, long-term contracts should be carefully evaluated in the light of the 2020 challenges as costs will spill over. Do contracts leave room to renegotiations that will curb the changes? Will the contract hold, once the pressure becomes real?
Needless to say, distillate pricing may rise due to the influx in demand. However, we believe that shipping will find a way to overcome this challenge. Most oil majors communicate that they will provide a solution for the industry in due time. We already have a multitude of products that fulfill the sulphur cap. More will come as demand stabilizes. Refineries are already changing production plans, and as demand becomes firmer, these plans will gain momentum.
The biggest challenge will be the cash flow obstacle. In other words, we expect pricing to be a bigger issue than actual availability. Local pockets might periodically have low availability, but history has shown us that, provided the price and demand is there, products will be available. So note should be taken on the vessel cash flow requirements. Current calculations show that the same business case will require a 40-70 % higher credit or cash facility. Historically, there is 270 USD/MT spread from 380 CST to MGO. This can be added to the cash flow demand currently tied up in bunkers.
Operators should enter into a dialogue with bunker suppliers as well as banks to plan around this.
To discuss the matter, we remain at your disposal: firstname.lastname@example.org