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‘Even if significant quantities of 0.5% sulphur fuel are widely available in 2020, it is possible that the price may not be substantially cheaper than 0.1% fuel due to the major investment required to produce it,’ says the International Chamber of Shipping.

In its latest Annual Review, published ahead of the ICS Annual General Meeting in Istanbul next week, the organisation addresses many of the key issues currently impacting the shipping sector, including the introduction of a 0.5% global sulphur cap in 2020.

The ICS notes that the decision to opt for 2020, taken at MEPC 70 in late 2017, ‘is highly significant because the cost of compliant low sulphur fuel is currently about 50% more than the cost of residual fuel, and in response to the greatly increased demand that will now arise in 2020 this differential may increase considerably.’

It continues: ‘Even if fuel costs stay at the current lower levels which have applied since the significant fall in oil prices in 2015, this mandatory switch to low sulphur fuel in 2020 could mean that bunker costs will return to their 2014 peak. But if by 2020, oil prices increase to something approaching US$70 a barrel – still well short of the 2014 peak – it has been estimated that the differential between compliant low sulphur and residual fuels could spike by as much as US$400 a tonne. (The International Energy Agency now predicts a crude price of about US$80 in 2020, assuming there is no oil price shock due to unforeseeable political events.)’

In terms of the IMO’s 2020 decision, the ICS suggests it was a largely political one.

‘The cap will apply in the middle of the ocean, where very few people live, but it was nevertheless adopted by IMO Member States in order to reduce risks to human health and to improve the marine environment (sulphur being considered generally as a cause of ocean acidification).

‘Although the supply of compliant fuel was projected by the IMO study to be tight – with some sections of the oil industry, amongst others, questioning the conclusion that adequate supplies of fuel will be available – IMO Member States nevertheless decided that it would be politically unacceptable to postpone implementation.’

The ICS Annual Review also looks at how refiners and vessel operators may prepare themselves for the global cap. The refining sectors will have to take steps to ensure availability of compliant fuel, and the ICS cautions that: ‘…governments need to monitor this carefully, since it may be in the refiners’ commercial interest to keep the supply of compliant fuel as tight as possible. It is important to remember that the IMO decision focused completely on the likely availability of compliant fuel and took no account of the possible purchase price.’

Furthermore, oil refiners may find it difficult to produce sufficient quantities of 0.5% sulphur fuel from day one, and in some locations other more expensive fuels, such as 0.1% sulphur distillate, may be more readily available. As such, says the ICS, ‘refiners and bunker suppliers may focus on meeting increased demand for existing low sulphur products in the knowledge that shipping companies will have no choice but to pay for them regardless of the price.’

According to the Annual Review: ‘But even if significant quantities of 0.5% sulphur fuel are widely available in 2020, it is possible that the price may not be substantially cheaper than 0.1% fuel due to the major investment required to produce it.

‘As a consequence of these supply issues shipowners could take an alternative route deciding to invest in other compliance mechanisms (which are permitted by MARPOL) such as exhaust gas cleaning systems (‘scrubbers’) or the use of low sulphur fuels such as LNG. The decision to implement the 0.5% sulphur cap in 2020 may also affect decisions on whether or not older and less fuel efficient ships will be sent for early recycling.’

The ICS Annual Review can be downloaded free of charge from the ICS website: www.ics-shipping.org.

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