Addressing delegates on the first day of Petrospot’s Middle East Bunkering Convention in Dubai, Tolson, Senior Partner, 20|20 Marine Energy, reflected on a gloomy and depressed commercial environment in 2017 for the trading, physical supply, storage and barging sectors.
Looking to the prospects for 2018, Tolson sees some reason for increased optimism, but the industry’s unpreparedness for the introduction of the 0.5% sulphur global cap in 2020 is a real and, as yet, unresolved cause for concern.
On a macro level, Tolson suggests that the global economic climate is improving, with continued growth in international trade and commodities, and stronger economic performance by the major economies. The self-imposed restraints on OPEC’s oil output quotas are also holding firm.
The shipping sector is showing some positive signs of recovery, he says, but he notes that the industry has changed substantially in that it has undergone a period of consolidation and rationalisation. As such, shipping ‘is unlikely to support traders and physical suppliers who have profited from the shipowners’ financial weakness over the past 10 years.’
According to Tolson, ‘it is now a buyers’ market.’
For the bunker trading community, disintermediation, a term applied by Tolson last year to describe the continued contraction and market exit of trading companies, will continue in 2018. However, those (generally larger) traders who do survive ‘will continue to provide a lifeline to those smaller suppliers and some owners who cannot get credit.’
On the supply side, ‘small and medium-sized physical suppliers will continue to be squeezed by bunker traders in search of margins,’ says Tolson, while the larger suppliers will continue to feel the pressure of competition, narrow margins and finance risks.
The large commodity traders, who some commentators had predicted would be looking to move more emphatically into the marine fuel space, are now in a stronger position, he suggests. They will increasingly play to their strengths of global sourcing capabilities and purchasing power – a position underpinned by the cheaper costs of capital.
Barging companies will increasingly feel pressure exerted by suppliers who are seeking to assuage the pain of lower margins by requesting lower delivery costs. And the outlook for storage companies remains grim, says Tolson, with market backwardation playing out in squeezed storage cost revenues and multiple vacant tanks.
2018, in terms of preparing for 2020, will be chaotic, he predicts. There are, as yet, ‘almost no scrubbers’, and there has been ‘limited work and investment in new fuels – and this applies to suppliers, refiners and buyers.’
In the year to date, ‘there is a lot of talk, but very little action,’ he notes.
In terms of 2020 ‘risk factors’ that the shipping and bunker industries should be considering now, Tolson points to future regional availability of compliant fuels, quality issues associated
with 0.5% sulphur fuel blends, and the conundrum of fuel demand and supply.
As such, industry players should perhaps look at securing long term supply contracts, entering into scrubbing leasing contracts (to mitigate high CAPEX investment), and locking in some price certainty through the use of derivatives – there is, suggests Tolson, ‘a lot to be done’ on this last element.
Credit risk will be a key consideration come 2020, he says, with higher fuel prices creating higher credit exposure for buyers, and higher working capital requirements for suppliers.