Image credit: Freight Investor Services (FIS)

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In the last of our series of articles on the 2020 sulphur cap, we will look at developments in the paper market. The changes in the physical grades and flow will, of course, cause a necessary change in all the associated industries from port infrastructure to insurance. At FIS our speciality is fuel oil hedging solutions for end user clients, so we will take a look at the developing paper market with respect to the low sulphur fuel switchover and what options these end users have.

I think it is fair to say that there is currently no perfect hedge for potential 2020 fuel risk, with the exception of continuing to use high-sulphur fuel oil (HSFO) on scrubber-fitted vessels.

For operators planning on using HSFO, the tried and trusted HSFO derivatives contract will give the perfect solution for being able to guarantee the costs of the fuel well into 2020. Currently everyone dislikes you, but at least you're sorted.

For the majority of people, their solution for the new IMO regulations will be using a blended 0.5% fuel oil, for which currently there are no direct equivalent paper contracts. To do so presents a choice for those who are looking to mitigate their fuel price risk in upcoming years. But, like squeezing into that pair of jeans from your 20s, those looking to hedge immediately will need to consider some slightly ill-fitting proxy trades.

For a proxy hedge, most counterparties have looked at a lower-sulphur-content fuel such as the gasoil contracts in Rotterdam and Singapore respectively. The two most used contracts are the Rotterdam 0.1% Gasoil and the Singapore Gasoil 10ppm contracts, making them overly compliant; but they are liquid, correlated, and tradeable today. You'll have to pay a pretty penny in premiums over both HSFO and the expected cost of 0.5% LSFO, but at least you will be able to sleep soundly at night knowing your hedge is on and working.

If you are able to sit on your hands for a few more months (which I suspect will be the position of the majority), then there will be specific 0.5% contracts coming into existence at the start of next year. Platts proposes to begin publishing new price assessments for RMG 380 CST marine fuel cargoes with a maximum sulphur limit of 0.5%, for loading in Singapore, Fujairah and Houston, and barges in Rotterdam, starting January 2, 2019.

And like the world's best pick 'n' mix for traders, there will also be the corresponding spreads between the current high-sulphur and these new low-sulphur contracts. The FIS contact details are the bottom of this article, so do get in touch to get set up to hit the ground hedging once these new contracts are operational.

With this in mind, there a several ways to approach hedging exposure: proxy gasoil trades; wait and directly hedge the 0.5% contract; hedge the HSFO contract now and then use the spread to roll it into ULSFO contract when it is introduced.

Each solution is specific to each client and the level of risk or premium they are happy to accept, but at least there are some options available, and operators do not just have to accept whatever costs the 2020 changes throw at them.

As a specialist broker of fuel oil derivatives - as well as wet and dry forward freight agreements - at FIS we have the expertise to help devise and execute whatever hedging strategy works best to keep you ahead of the pack for the 2020 switchover.