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Shipowners in “wait and see” mode ahead of 2020 sulphur cap, as uncertainty looms large

Shipowners are growing wary ahead of the 2020 sulphur cap decided by IMO and have chosen to adopt a “wait and see” approach, before they make any hasty decision. In its latest weekly report, shipbroker Gibson began its analysis by noting that “the date is sometime in 2020, the event is the annual Alternative Fuels award ceremony held in front of a packed auditorium full of stakeholders covering representation from shipowners, refiners and the oil majors. The audience is eagerly anticipating the announcement of the coveted winner. The best newcomer Oscar went once again to LNG, still not quite worthy of the big prize. While the lifetime achievement award went to fuel oil for decades of loyal service to the shipping industry. So who will win the ultimate prize ‘compliant low sulphur fuels’ or ‘scrubbers’? On the stage there appears to be some confusion, who has the envelope containing the all-important result?”

According to the London-based shipbroker, “the above paragraph may be a little skit on events at the recent Hollywood Oscar’s ceremony, however it does illustrate the huge amount of uncertainty that currently surrounds the sulphur limits issue. Shipowners appear to have adopted a wait and see approach, while many refiners have the headache of whether to make considerable investment in upgrading, in what are in, many cases, old inefficient production facilities. In addition, what will become of all the surplus of high sulphur fuel (HSFO), effectively a by-product of the current cracking process?”

Gibson added that “lets take a look at some of the options. Increasing use of low sulphur fuels has been widespread over the past few years with the growth of the ECAs. During the recent low bunker price environment, the additional ECA low sulphur fuel costs have been absorbed by counterparties. But where will the oil price be in 2020? Another option is to continue to use HSFO and install a ‘scrubber’ to clean the engine emissions prior to exhaust discharge, but this solution requires upfront capital investment. Higher bunker prices would make this a much more attractive solution as the price differential between distillates and HFO would be that much greater and consequently the scrubber repayment period would be quicker (see graph). But even here there are other considerations to be thought through not least the age of the vessel. With many owners controlling large fleets, investment here could be considerable even if technology brings down equipment costs. Given the above it is hardly surprising that owners are adopting a wait and see approach”.

The shipbroker said that “refiners have a different approach, who will pay the huge investment costs to change refinery plant to produce compliant fuel – namely distillates? Here the challenge is whether there will be enough compliant product to meet demand by 2020? The industry estimates that on current requirements refiners will need to replace around 250 million tonnes of HSFO with a substitute to meet the 0.5% maximum sulphur specification. Alternative fuels have been developed by several of the oil majors, but the challenge here is to find a cost-effective way to remove the sulphur from HSFO. This also raises the issue of compatibility between the new hybrids. Also, why would refiners want to develop cheaper alternatives as owners already pay a premium for distillates. Should owners favour adopting scrubbers the incentive for refiners to develop cheaper cleaner fuels disappears”.

“In conclusion, it will be difficult to pick a winner here. In reality each solution has its own merits in the right set of circumstances and in all probability, each will take a share of the prize. It is not surprising that shipowners have adopted a wait and see approach. The headache of current trading environment is perhaps prohibitive for owners to sanction more debt and in the end owners will leave the party without clutching any awards”, the shipbroker concluded.

Meanwhile, in the crude tanker market this week, in the Middle East, it was “an active week for VLCCs, but the heavy weight of availability persisted to keep the market boxed in at an average low ws 50 mark to the East and high ws 20’s level to the West – basically unchanged from last week’s numbers. March fixing is rapidly drawing to a close now and opportunities for Owners to kick the soft trend will be limited. Suezmaxes had a bright start and initially drove rates up to ws 95 to the East and into the low ws 50’s to the West, but from midweek things slowed again and no further gain could be posted into the weekend upon a flatter feel. Aframaxes couldn’t maintain their previously upward move, but did manage to tick over at around 80,000 by ws 120 to Singapore for most of this week – perhaps a little lower by the week’s end and into next week”, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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