INTERVIEW: IMO 2020 a success but other hurdles linger for bunker industry: expert
10th February 2021 00:20 GMT

The transition to the International Maritime Organization’s global sulfur limit for marine fuels "went well" but other challenges linger for the bunker industry as it grapples with tough shipping markets, margin pressures and impending stricter environmental rules in global shipping, an industry expert told S&P Global Platts in an interview.

"Honestly [there were] very few issues [related to the 2020 transition], and most owners are dealing with much fewer claims than they did prior to 2020...from a quality control point of view, because of great preparation and excellent research work done by labs etc.," Adrian Tolson, director at global research and consulting firm BLUE Insight said Feb. 6.

"I do, however, have concerns this will not continue...I can see more issues coming as the average quality of the VLSFO barrel will fall as oil demand and refining activity returns to normal," he said. "I see more complicated, less stable blends and some challenges."

 

Scrubber solution

Exhaust gas cleaning systems, or scrubbers, also eased the transition to IMO 2020.

Around 4,000 ships are currently fitted with EGCS, which helped to meet the sulfur limit requirement set by the IMO, the Clean Shipping Alliance 2020 said in a statement on Jan. 29.

As far as scrubbers are concerned, Tolson said owners will likely continue to use them, and some will install the technology on newbuild and retrofits.

In Singapore, the world's largest bunkering port, the price differential between HSFO and Marine Fuel 0.5% sulfur averaged $298.90/mt in January 2020 as the market was transitioning to the IMO2020 mandate. The price differential narrowed to average as low as $60.32/mt in September but recovered to average $103.33/mt in January, according to Platts data.

“Spreads seem to be getting to close to the low $100s, which supports retrofitting and newbuild installation on many big and medium-sized ships…so we will see more scrubbers,” Tolson said.

However, Tolson said he did not consider them a long-term solution. “I think, perhaps illogical, environmental pressure will make them less popular.”

“IMO will not quickly outlaw them…their popularity will die as we become more focused on decarbonization issues,” he said.

 

Thinning margins, credit concerns

The biggest challenge in the bunker industry will be keeping reasonable operating margins, Tolson said.

IMO 2020 was a "real bonus" for the industry, at least on the supply side, which was finding it increasingly hard to make money as the decade ended, he said.

"Suppliers were seeing competition and margin erosion and increasingly problematic credit situations," Tolson said. "Then everyone had (or most) had a very profitable six months followed by a challenging nine months."

The last nine months in particular, with reduced demand and increased supply, saw a continuation of margin pressures, he said.

"We also saw a lot of new entrants into the market…refiners, commodity traders – margins all getting squeezed. So, making money in the current market is very tough."

Another big hurdle will be credit, Tolson said.

“The industry has yet to really feel the credit issues generated in the commodity trading industry by the collapse of companies like GP Global and Hin Leong," Tolson said. "These were not only giant oil traders, but they were also well-known bunker suppliers.”

“It’s getting tougher and tougher, as prices rise, to generate working capital and operate, and this is going to make it tough for physical suppliers, put a strain on bunker traders and limit the credit for buyers,” he said.

Margin pressure has also pushed many suppliers into taking more shortcuts and perhaps some new IMO 2020-inspired suppliers will drop out of the market, leaving space for more quality challenged replacements, he said.

“I think we will all survive this…but buyers need to remain vigilant and cautious…we haven’t see a “normal” post-IMO 2020 market yet,” he said.

 

Outlook

 

The global coronarvirus pandemic, in its wake, brought unprecedented demand destruction to the oil markets.

According to Tolson, the decline in global bunker fuel demand in 2020 was “just under 10%” year on year as sales volumes at key ports such as Singapore, China and Rotterdam tempered the impact of a fall in bunker demand that some of the small and medium-sized ports saw.

Tolson said the outlook for 2021 was “generally good,” predicting a recovery in global bunker fuel demand to “much the same levels as 2019.”

Industry consolidation will also continue, he said. Smaller traders will likely continue for some time but like small and medium physical suppliers, they will soon be eclipsed by the alternative fuel suppliers.

On the other hand, alternative fuel suppliers will still need to provide credit, he said. “So, perhaps a new bunker trader with a different set of expertise is coming.”


Bunkerworld .,
10th February 2021 00:20 GMT