It is said that the only certain things in life are death and taxes. This is certainly the attitude the shipping industry should take towards the impending IMO 2020 sulphur cap.
But from the myriad reports, conferences, and press releases on this issue, with just nine months left to go, it's fair to conclude that the market is still unsure of how to prepare financially for the changes.
The first indications (in the middle of 2018) for the new 0.5% sulphur fuel oil (VLSFO) had put the differential with high-sulphur marine fuel oil (HSFO) around
$250, with some estimates putting it closer to
$350.
The initial predictions of large cost hikes had naturally pushed shipowners to take advantage of the prospect of the lower cost of HSFO with sulphur scrubbers. This would allow them to run on cheaper fuel and avoid the uncertainty surrounding the creation of a new global grade of marine fuel oil.
Those taking the 'wait-and-see' approach have been comforted by the pricing of 0.5% Rotterdam and 0.5% Singapore levels at a premium to HSFO of as little as
$30-50/tonne. The problem with the wait-and-see approach is that it assumes the refinery and bunker supply industries can cope with such a seismic change without problems, and that a changing global oil market will quite quickly be able to provide the exact crudes needed to supply the needs of the shipping industry.
The market is pricing the difference between the HSFO and VLSFO at around
$185-200, yet these values can change like the wind and are current prices for future dates - so are not necessarily good predictions. Scrubber users are banking on there being as large as possible difference between the current HSFO and the new VLSFO to justify their capital outlay for scrubber retrofits and newbuilds.
Yet, relying on the market to price a large differential and keep that consistent does not take into account the falling supply of heavy crudes and the shift in supplies to accommodate the new fuel grade. This has pushed up premiums for heavier products, eating away at the potential benefits of a scrubber-fitted ship.
For the 'wait and see' community, the risk is being blindsided by the currently low physical quotes for compliant VLSFO. The index may seem surprisingly low compared to the wild predictions last year; however, the physical market has seen only a tiny number of trades reported.
This means the index is in fact pricing something that has no current demand, on a grade of fuel that has no international standard. This explains the huge disparity that currently exists between the physical index prints and futures pricing for 2020.
The gap between the physical and derivatives markets will close as we draw closer to January 1, 2020, and the current forward curve suggests that activity on both physical and futures could pick up quickly once more prices are published and more futures trades are concluded.
The factor that will be thrown into the mix once we get to 2020 and implementation day is that of physical supply. Getting a new product produced, stored, distributed and loaded for the majority of the world fleet is a colossal challenge. There will be shortages, premiums paid to make sure products are available and suppliers will look to capitalise. Any disruptions of this sort will mean exposure to upwards price risk.
End users and suppliers will need to establish where their fuel P&L sits and adjust their risk management accordingly. Those using scrubbers can use derivatives to cover any narrowing of the HSFO vs VLSFO by selling that spread. For those intending to use IMO-compliant fuel, there is the opportunity to hedge using the 0.5% and gasoil derivatives to provide clarity on costs for the changeover.
End users are caught between a rock and a hard place; knowing which fuel to use and where it will price in 2020. Rather than sit still, it could be better to grab hold of the rope and look at how hedging can help rather than hoping for the best.
