November 19, 2019

Final Countdown to IMO 2020

Starting January 1, 2020 a new rule by the International Maritime Organization will come into effect, reducing the allowable sulfur level in the global maritime fuel market from the prevailing 3.5% to 0.5%. The rule was decided on three years ago, and since then fuel marketers, refiners, and shippers have been slowly but surely preparing. 

As of January 2018, the global marine fleet had a carrying capacity of 1.9 billion dead-weight tons. Asian companies hold approximately half of this capacity followed by companies in Europe and North America. Chinese firms have the largest fleet by vessel number while Greece and Japan vie for largest fleet by carrying capacity. Meeting low sulfur fuel requirements will necessitate changes in both the shipping and refining sectors, and these changes have varied by region based on available technologies. Ongoing product price movements provide insight into how different regions are planning to meet their upcoming fuel needs. 

Since the change was formally announced, Stratas Advisors has released a bevy of reports detailing expectations for the impact on the refining and shipping sectors and benchmark prices. Within this commentary, we evaluate our previous analyses and discuss which of our forecasts have come to fruition.

What Option Did Shippers Choose

Upon announcement of the new regulations, shippers had two primary options. Shipping companies could choose to install exhaust gas cleaning systems known as “scrubbers” or plan to operate with purchases of the more expensive compliant fuels. Additionally, shippers could choose to retire their oldest, least fuel-efficient assets.

Although scrubber installations are an expensive upfront cost, they allow the ship to operate on cheaper fuel. Originally, shippers were unsure what the availability of compliant fuels might be, as refiners had not fully announced plans to increase fuel output. Installing scrubbers could protect operational budgets from price spikes caused by fuel shortages. A major incentive to scrubber installation is the price differential between 0.5% sulfur fuel oil and fuel oils above 2% sulfur levels.

We expected that the total number of ships with scrubbers installed by January 2020 would reach approximately 3,800 vessels. According to the latest numbers from DNV GL – an internationally accredited registrar and classification society – a total of 2,947 ships have had scrubber installed and another 600 to 800 installations will be completed by the end of 2019. This comes to 3,000 to 3,300 installations, somewhat below our expectations. With a total marine fleet of approximately 70,000 vessels, scrubbers will account for 4-5% of the fleet. Clearly shippers have chosen to rely on more expensive fuel purchases to achieve initial compliance.

 

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