Logistics And Frieght Forwarding

New shipping fuel regulation set to hit commodities

A change in international fuel regulation little discussed outside the shipping industry is set to wreak havoc on the world of commodities. In an attempt to curb emissions from ships, the UN International Maritime Organization has placed a cap on sulphur content in marine fuel oil from 2020. While good news for the environment, the pending change in bunker fuel standards threatens increased fuel prices, hitting airlines and consumers at the pump, as well as pushing up freight rates.

“It’s very very tricky,” says Lars Robert Pedersen, deputy secretary-general at the Baltic and International Maritime Council (Bimco), representing about 60 per cent of the world’s shipowners. Six months ago, the IMO which governs international shipping, decided to cut[1] sulphur limits in marine fuel from 3.5 per cent to 0.5 per cent in 2020. In two and a half years’ time, ship owners will either have to switch to more expensive higher quality marine fuel, invest in emissions-cleaning systems referred to as “scrubbers”, or switch to alternative fuels such as liquefied natural gas.

Many analysts see ships shifting to higher grade marine fuel. A survey of 51 shipowners by UBS showed that three-quarters would buy low sulphur fuel.

Whatever choice they make, it will be expensive, with some estimates pointing to shipping cost increases of up to 85 per cent. But the knock-on effect of the rule change to marine fuel is likely to ripple beyond the world’s shipping fleet to the oil industry and commodities trading.

“It’s huge,” says Kho Hui Meng, the head of Asia for Vitol, the leading independent oil trader, adding: “It will put the trading market in a spin.” The International Energy Agency calls the lowering of the bunker fuel emissions cap “easily the most dramatic change in fuel specifications in any oil product market on such a large scale”. The problems for the oil market are two-fold.

Although high sulphur bunker fuel accounts for only 4 per cent of global oil demand, according to the IEA, the marine market has traditionally been an important outlet for the refining industry, absorbing residue from the refining process, which is turned into heavier fuel oil. Mr Kho says that about 3m barrels of high sulphur bunker fuel will be displaced. “We are still trying to work out its implications.”

Second, the higher demand for lower sulphur fuels will exacerbate the strain of limited capacity and increase the prices of oil products, including diesel, jet fuel and petrol. “Since the key clean products — gasoline, jet fuel and diesel — are closely related, when demand and pricing for one surges that tends to also raise prices of the others,” says Martin Tallett, president of Ensys.

A report[2] by EnSys Energy and Navigistics Consulting commissioned by Bimco and several petroleum associations shows that the bunker fuel rule changes would increase prices by about £10 to nearly £20 per barrel, or 11 to 23 per cent, across all products worldwide. The product markets are already reflecting the rule change, with forward prices in 2020 for high sulphur fuel falling and high quality gas oil, a benchmark for low sulphur marine fuel, rising, according to[3] S&P Global Platts. Oil refiners will especially feel the impact of the rule change as the supply and demand for various products shift.

Ensys says its modelling shows that the fuel rule changes will lead to “extreme difficulty — and indeed potential infeasibility” for oil refiners to supply the shipping industry as well as meeting demand for other fuels such as jet fuel and petrol.

Since the key clean products — gasoline, jet fuel and diesel — are closely related, when demand and pricing for one surges that tends to also raise prices of the others

The wider commodities industry, from oil to coal to sugar, also faces a rise in freight rates. The shipping industry is crucial for world trade, carrying about 90 per cent of goods, and fuel costs account for 70 to 80 per cent of total voyage expenses, according to S&P Global Platts. Wood Mackenzie, the fuel consultant, estimates that the shipping industry’s fuel costs could rise by up to £60bn in 2020, or more than 50 per cent to £174bn.

Sushant Gupta, research director of the consultancy’s Asia refining, calculates that the bunker fuel rule change will add £1 to a barrel of crude oil transported from the Middle East to Singapore. Despite the concerns, the IMO says last year’s decision by member states was based on a review by consultancy CE Delft, which concluded that the refining sector would be able to produce sufficient low sulphur bunker fuel to meet the industry’s needs. “It’s been motivated by the huge beneficial impact on the environment and on human health,” says the IMO. However, with uncertainty looming over the consequences, Bimco’s Mr Pederson says: “It’s a global experiment.

That’s what we’re warning about.”

References

  1. ^ decided to cut (www.imo.org)
  2. ^ report (www.ensysenergy.com)
  3. ^ according to (www.platts.com)



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