Bunker market poised for radical change

A committee of the International Maritime Organization (IMO), meeting in October, will consider the findings of a study into the availability of low-sulphur bunkers. Once it has completed its deliberations, the Marine Environment Protection Committee (MEPC) will recommend whether 2020 or 2025 should be the date the world’s merchant fleet switches to fuels with a sulphur content of no more than 0.5%.

Whether the cap is implemented in four or nine years – although the majority of opinion formers believe 2020 will be enforced – shipping companies will be required to face a complete overhaul of their bunker strategies.

Once the current 3.5% sulphur limit is replaced, intermediate fuel oil (IFO), the mainstay of the bunker industry and the fuel of choice for the bulk of the world fleet, will cease to be compliant with international standards.

Ship owners and bunker players both face radical change. Whatever timetable the IMO adopts, shipping companies’ compliance solutions are likely to be as varied as the options available. It is here where physical fuel suppliers must come to the fore; providing crucial counsel and advice, and based on their knowledge of the market, helping ship owners take compliance decisions that fit their business strategies and trading routes.

While the relationship between bunkering companies and the shipping industry has never been easy, the two parties have never needed each other more. For physical suppliers that want to be competitive and seize the opportunities of a market in transition, they must focus on building a reputation based on integrity, responsibility, in-depth knowledge and an unequivocal customer focus. They must be solution agnostic when it comes to compliance, creating strategies that genuinely meet the needs of their customers’ business strategies. It is this that will pave the way for closer, longer-term, and commercially better relationships.

Distillate fuel

But, what choices will ship owners and operators have once the new sulphur rules come into force? Blending intermediate fuel oil (IFO) to meet a 0.50% sulphur limit is possible but it is doubtful many refiners will consider it worthwhile.

In the current dynamics, the simplest compliance solution might appear to be to switch to distillate fuel. This option has already been tried and tested in the North American and North European Emission Control Areas (ECAs), where the sulphur limit in fuel is 0.1%. With the current low cost of crude, the price of distillates is over 50% cheaper than its highs of 2014, where it cost circa $1,000 per tonne, making it the most widely used compliance solution. Of course, it is very difficult to predict what prices will be in four years time; we can assume higher than today, but by how much?

A key question outside of the pricing debate is whether refineries will be able to produce the material in sufficient volumes to meet demand. It’s an issue that the International Bunker Industry Association (IBIA) recently considered, and concluded that a 0.5% global sulphur cap by 2020 would lead to shortages of compliant fuels. At present, many owners and operators have not yet confirmed their compliance strategy. Without this the refiners are reluctant to invest the huge quantities of capital required to produce middle distillates for the market. It is another challenge for physical suppliers, who, in building closer relationships with their customers should be helping them to plan accordingly.

Ship owners who have equipped their vessels with emission abatement technology (scrubbers) will be allowed to continue burning, conventional, high sulphur IFO. Scrubbers extract sulphur from a ship’s exhaust plume to the point that where the emissions become comparable to, or even below, those achieved by burning low sulphur fuel.

So far, regulatory authorities have backed the view that scrubbing is a legitimate and viable route to compliance. It looks probable that any ship equipped with an approved emission abatement system will be able to continue burning high sulphur IFO.

But the uptake of scrubbers has been slow. Indeed, the current estimate for vessels using scrubbers is less than 500. Much of this is due to the lack of liquidity within the market, ship owner reluctance to expend the capital investment, as well as the low price of crude making distillates currently the most cost-effective solution. However, scrubbers have also been blighted by industry concerns that the technology increases fuel consumption by between 1-3% – owing to an increase in engine backpressure – as well as the issues over the disposal of waste contained in the wash water.

A fundamental challenge for market players is whether the worldwide infrastructure needed to provide conventional IFO would remain in place if fewer than a thousand vessels were allowed to use residual product. However, if crude prices do rise over the next few years, putting pressure on distillate use, there is a good chance that we will see an increase in scrubbers, and a significant dip in heavy fuel oil prices; ultimately it is a by-product that is best used within shipping, and a market will be created for it.

Liquefied natural gas

Liquefied natural gas (LNG) is also a proven and effective way of complying not only with sulphur regulations, but also with almost all the environmental rules currently in prospect.

Using LNG as a bunker fuel virtually eliminates emissions of particulate matter (pm) and sulphur oxide (SOx). It cuts NOx emissions by up to 80% an in a world where there is growing anxiety about greenhouse gas emissions, using LNG use can reduce CO2 emissions by 30%.

It is, therefore, no surprise that LNG bunker infrastructure projects are going ahead, some with incentives from the European Union. Engine manufacturers are also reporting a steady stream of orders for dual-fuel propulsion systems that can switch between LNG and conventional fuel.

LNG is beginning to look like a genuine alternative to oil-based bunker fuel. And while significant development is needed in the creation of the bunkering infrastructure and standards for LNG, the medium to long-term prospects remain positive. One analyst has suggested the market for LNG as a bunker fuel will expand at a rate of more than 60% a year for the next ten years. Interest in LNG has been spreading from its Scandinavian heartland and in 2015 Japan, South Korea, India, Italy, the United Kingdom, Germany, the United States and Canada were all able to report their first LNG bunker operations.

As part of its mission to provide customers with choice in relation to compliance solutions, Bomin is already active in the marketthrough its subsidiary Bomin Linde LNG and to help customers meet existing ECA requirements.

The current price of crude continues to be the elephant in the room. In essence it will ultimately define which way the market goes in terms of compliance. However, forecasting oil prices is notoriously difficult. Despite this, there is every chance crude prices will climb and that distillate prices will surge. It is therefore critical that owners and operators look to mitigate this risk and have a strategy in place that ensures they can survive should crude oil prices recover.

Mass flow meters

Outside of the issues of compliance, and scrutiny over crude prices, the bunkering industry continues with age-old challenges of ‘quality’ and ‘quantity’. However, there is positive progress and significant strides are being made. Mass flow meters (MFM), the primary technology to ensure quantity, are set to become more widespread. In Singapore, 60 out of 228 bunker tankers have already been approved to use MFMs, and the Maritime and Port Authority (MPA) of Singapore says that already more than 500,000 metric tonnes of bunkers are being delivered every month via bunker tankers equipped with MPA-approved Mass Flow Meters. By the end of the year all of Singapore’s bunker tankers and barges will need to use MFMs if they are delivering fuel oil. Where Singapore – the world’s biggest bunkering port – goes other bunker locations look set to follow.

However, it is not only the type of fuel and the technology surrounding delivery that is evolving; the very structure of the bunker market is under scrutiny.

It is hard to overstate the impact of the collapse of OW Bunker, and if there is one lesson the market has absorbed, it is that purchasing bunkers through intermediaries involves risk.

Though the United Kingdom’s Court of Appeal granted the owners of the Res Cogitans leave to appeal in February, numerous ship operators are currently facing duplicate claims for fuel supplied through OW Bunker but delivered by a sub-contracted physical supplier.

There is a mood among bunker buyers that they need to reduce the transaction chain – and therefore risk – and build strong relationships with their physical fuel suppliers. The aim is to create greater transparency, accountability, minimise exposure and increase operational and cost efficiencies.

The need to change

All these developments call for physical suppliers themselves to be ready to change. At Bomin we have long accepted that suppliers need to move from a purely transactional mentality to building partnership-based relationships, founded on professionalism, trust and transparency.

Of course they face challenges, if only because their customers are being squeezed by the toughest market conditions in decades. Large parts of the shipping industry are labouring under the crushing weight of surplus tonnage. The size of the idle containership fleet is nearly one million teu and ‘dry bulk’ has become a by-word for financial distress, with the collapse in the sector’s rates dragging on far longer than anticipated.

Fuel suppliers need to ‘put themselves in the customers’ shoes’ and try to understand the pressures they face. To be effective partners they need to ensure they have the global infrastructure, expertise, and know-how, as well as the financial strength; not just in terms of banking facilities, but cash reserves: true liquidity.

Against a background of far-reaching regulatory change and a painfully sluggish global economy making the right fuel purchasing decision is as important – and more complex – than ever.

It is no longer enough for suppliers to just give assurances on the quality and quantity of bunker products, that has to be a given.

In order to remain competitive, physical suppliers in the run-up to 2020 will have to deliver a solution and a world-class service that maximizes operational and cost efficiencies, ensures compliance, and adds value to customers that goes far beyond the price of the basic product.