Although the shipping industry is facing the immediate challenge of the sharp decline in global maritime trade, the potential risks in the sulfur limitation regulation imposed by IMO can’t be ignored.
A combination of weaker demand due to the coronavirus and warm winter, strategic buying of clean marine fuels ahead of the deadline and a greater supply of middle distillates from refiners has overshadowed concerns around fuel quality and availability.
In an interview with S&P Global Platts on Monday, the executive vice president of Mol Ferenc Horvath, a Hungarian energy company, said he didn't think the real impact of the IMO's sulfur restriction would be apparent until April or May, given the uncertainties in the current data.
Quality Issues
The biggest threat comes from quality issues of VLSFO(very low sulfur fuel oil), which will likely end up as the preferred choice of the industry. But sedimentation, stability and compatibility issues remain unresolved, and the industry has been debating the risks of sediments along with co-mingling paraffinic and aromatic balances in fuels leading to sludge clogging up engines.
Rick Joswick, head of Global Oil Pricing and Trade Analysis at S&P Global Platts, said"The sulfur limitation problem will last longer than the impact of the COVID-19 pandemic. The warm winter impact on oil demand and epidemic impact on jet demand are masking the IMO upside demand on MGO(marine gasoil), but everything else associated with IMO is still full in play. "
BIMCO analyst Peter Sand believes the risk is something that the industry can handle. "The issue on sediments is no bomb, but obviously an issue for the refiners to deal with. For bunker tanks, filters and engines, this is an operational issue, cumbersome to deal with but manageable. However, the fuel supplied to the industry should not generate problems like that. "
In general, the wealthiest and most organized shipowners will fare best with the new fuels. Those who are able to pay a premium for fuels with a universal compatibility guarantee, and those able to plan their ships' schedules weeks or months in advance and arrange the availability of the right fuels accordingly, will largely be able to avoid problems. Conversely, shipowners seeking to minimize costs, ships on the spot market with little control over their ports will bear the brunt.
Availability Concerns
The key hubs such as Singapore, Fujairah and Rotterdam have all been well stocked in VLSFO, while shippers rushed to snap up cleaner fuels to avoid any panic. There was an initial rush to procure VLSFO due to availability concerns at the start of January. Since then demand for VLSFO has slowed, putting downward pressure on prices and widening the spread between it and MGO.
"Fuel availability in major hubs was not an issue." said Sand "Actually, we are worried that bunker supplier once again will take advantage of the situation commanding a massive premium, not based on any fundamental factors"