How cruising’s coronavirus crisis alters marine-fuel equation
Cruising is part of the hospitality industry — it’s all about keeping guests happy. Commercial shipping is part of the global logistics sector — it’s about moving cargo from A to B. But there’s a major overlap between the two: fuel.
The cruise sector is a voracious energy consumer. Cruise ships don’t just burn bunkers for propulsion, they guzzle fuel to power their massive hotel superstructures: the rooms, restaurants, bars, casinos, elevators, shows, roller coasters, ice-skating rinks and wave machines.
The sudden cessation of cruise itineraries due to coronavirus will reduce global demand for both 3.5% sulfur heavy fuel oil (HFO) and 0.1% sulfur marine gasoil (MGO). This, in turn, could affect the bottom lines of commercial ships, particularly those with exhaust-gas scrubbers.
Carnival Corporation (NYSE: CCL) is by far the largest cruise-vessel holding company in the world. It owns 105 vessels (excluding newbuilds) marketed under the brands Carnival Cruise Lines, Princess Cruises, Holland America Lines, P&O Cruises, Cunard Line, Costa Cruises, AIDA Cruises and Seabourn Cruises.
Carnival’s latest fiscal year (FY) ended Nov. 30, 2019, before coronavirus struck. Its ships had consumed 3.312 million tons of marine fuel at a total cost of $1.562 billion in FY2019, and the company expected to consume 3.405 million tons of fuel in FY2020.
The IMO 2020 rule requires all ships without exhaust-gas scrubbers to consume either MGO or 0.5% fuel known as very low sulfur fuel oil (VLSFO); those with scrubbers can still burn HFO.
Carnival has installed scrubbers on more than half of its fleet, has a small number of vessels fueled by liquefied natural gas, and — like other cruise operators — has opted for MGO over VLSFO for nonscrubber ships. In its December earnings announcement, it estimated that FY2020 consumption would be 50%-55% HFO, 40%-45% MGO and 5% other fuel types.
Royal Caribbean Cruises Ltd.
Royal Caribbean Cruises Ltd. (RCCL, NYSE: RCL) is the second-largest owner. Including joint ventures, it owns 61 ships (excluding newbuilds) marketed under the brands Royal Caribbean International, Celebrity Cruises, Azamara, Silversea, TUI Cruises and Pullmantur.
RCCL spent $698 million on marine fuel (net of hedges) in 2019, with an estimated consumption of 1.486 million tons. When it announced 2019 results in February, it projected that its fleet would consume 1.534 million tons of fuel in 2020.
It did not disclose its expected fuel mix but previously stated that it planned to install scrubbers on all of its ships and that scrubbers would be installed aboard 60%-70% of the fleet by this year.
Norwegian Cruise Line
Norwegian Cruise Line Holdings (NYSE: NCLH) operates 28 vessels under the brands Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. It consumed an estimated 836,000 tons of fuel in 2019 at a total cost of $409.6 million net of hedges.
When the group announced results in February, it projected it would consume 885,000 tons of fuel this year and that its fuel mix would be approximately 60% MGO, 40% HFO.
Global cruise consumption
Disclosures of the three U.S.-listed cruise holding companies allow for a rough estimate of global fleet consumption.
RCCL puts the global fleet capacity at 580,000 lower berths (based on two berths per cabin). Using that figure, Carnival Corporation owns 43% of capacity, RCCL 24%, NCL Group 10%, and other companies including MSC Cruises and Disney Cruise Line 23%.
Putting their individual estimates together, the U.S.-listed cruise owners had been on track to consume a combined 5.8 million tons of fuel this year. On a pro rata basis, this implies that the entire global fleet would have consumed around 7.5 million tons.
To put that in perspective, a container ship with a capacity of 10,000 twenty-foot equivalent units (TEU) sailing at 16 knots consumes around 100 tons of fuel a day. Assuming 250 days at sea per year, its annual consumption would be 25,000 tons. The cruise industry’s consumption is the equivalent of 300 10,000-TEU container ships.
Maersk Line, the world’s largest container carrier, had 708 owned and chartered-in ships at the end of last year with an average capacity of 5,812 TEU. Maersk consumed 11 million tons of fuel in 2019.
Another comparison: A Capesize (a dry bulk ship with capacity of around 180,000 deadweight tons) that burns 47 tons of fuel a day and is at sea for 300 days a year would consume 14,100 tons annually. The cruise industry consumes the equivalent of 530 Capesizes.
HFO-MGO fuel mix
Following the implementation of IMO 2020, most commercial vessels opted for VLSFO, not MGO, as the former is cheaper than the latter. The spread is currently around $75 per ton, according to data from Ship & Bunker. In contrast, cruising opted for MGO as opposed to VLSFO, despite the higher cost.
Another difference: The cruise industry has been much more aggressive in adopting scrubbers than commercial shipping. Clarksons Research estimates that 68% of the global cruise fleet (weighted by gross tonnage) is planned to be fitted with scrubbers.
Based on the individual cruise owners’ estimates of their total consumption and fuel mix, the U.S.-listed companies were on track to consume a combined 3.1 million tons of HFO in 2020, 2.5 million tons of MGO and 0.2 million tons of other fuels.
Assuming a lower scrubber penetration for the rest of the global fleet of 20%, a back-of-the-envelope estimate for global cruise industry consumption comes to 3.9 million tons of MGO and 3.4 million tons of HFO.
Whatever the actual numbers really are, they’re certainly big enough to affect marine-fuel markets for commercial shipping.
Returns on scrubbers have been negatively affected by the plunge in crude pricing, which dragged down the price of VLSFO at a faster pace than the price of HFO and cut the VLSFO-HFO spread. The narrower the spread, the less savings from burning HFO and the longer it will take to pay back the scrubber investment.
The halt to cruise deployments will translate into an abrupt reduction in demand for HFO, but not for VLSFO because cruising favors MGO over VLSFO. All else being equal — which in this market, is isn’t — cruising’s coronavirus crisis should be a tailwind for the VLSFO-HFO spread, a plus for cargo ships with scrubbers.
Source: Freight Waves by Greg Miller (https://www.freightwaves.com/news/how-cruisings-coronavirus-crisis-alters-marine-fuel-equation)