Sergey Ivanov (MABUX): “The global bunker market still totally unready to play by new rules”
With new global sulfur cap in marine fuel and other environmental initiatives coming into force, the markets of shipping, logistics, port infrastructure, production of oil products and LNG will face dramatic changes. Sergey Ivanov, Director, Marine Bunker Exchange (MABUX) AB in an interview with PortNews shares his view on how the new low sulfur marine fuel regulation could hit the entire industry.
- Judging by political news, the last few years were anything but glory days of the global shipping. Countries have plunged into trade wars, sanctions regime, the markets are falling, fuel market shows unpredictable mixed movements with severe environmental restrictions being imposed. All these circumstances will enavitably have a negative impact on supply of bunker fuel. Tell us, what is actually going on, will you?
- Recently, quite an aggressive strategy of various international institutions and organizations, rather than geopolitics has been the main driver of the global fuel market. That was primarily the International Maritime Organization (IMO) policy aimed at tightening of harmful emissions requirements, which inevitably entails a fundamental change in game rules in the global shipping market. At the same time, the market itself is remains somewhat sluggish while the 2020 sulfur cap clocks are ticking. The market volume (consumption about 4 million b/d, of which about 3 million barrels are high sulfur products) and, what is most important, virtually nothing has changed in its structure. It seems that everything will be decided at the last moment. However, it is still too soon early to say what those decisions will be and in what direction (or directions) the bunker business will move.
- How does the market demand situation look depending on fuel types?
- In connection with global restrictions on sulfur emissions coming into force as from January 1, 2020, we register more and more questions about availability of new low-sulfur blend with 0.5% of sulfur content, the so called VLS FO which stands for Very Low Sulfur Fuel Oil. Bunker fuel suppliers and shipowners are primarily interested in products availability in various regions of the world, as well as the price in comparison with traditional marine fuel blends: high-sulfur and low-sulfur products IFO380 HSFO and MGO LS. Unfortunately, we have no specific answers so far neither to the first nor the second questions. According to the plans of leading global bunker suppliers, the first deliveries of VLS FO are expected in 3Q 2019. In the meantime, we can be guided by VLS FO futures trading, for example, by Singapore FOB Marine Fuel 0.50% (Platts). However, trading also remains sluggish with IFO 380 HSFO and VLSFO products price spread showing sizable fluctuation: $ 30.0-40.0 to $ 200.0 pmt which indicates the absence of a stable pricing trend for VLSFO. The main types of marine fuel in the global bunker market are 380 HSFO and MGO LS.
As for Northern Europe, any changes in the region’s market structure will be minimal, since we are already working under stringent restrictions on emissions ECA-1, as from January 1, 2015.
- What do market analysts expect in the short and medium term?
- In the near and medium term, we believe that global bunker market players are totally unready and reluctant to follow the new emission limit rules. This applies to both the fuel consumers — shipowners, bunkering companies and suppliers — oil refineries. Instead of preparing for the new LS fuel blends production (in many regions this means, first of all, restructuring of the production process and huge investments), many refineries generally refuse to produce the bunker fuel as unprofitable (some experts say the total number of such refineries nears 40%). This gives us good reason to doubt that at the time of entry into force of the emission limit requirements the supply of LS fuels will be sufficient. It is clear that any supply disruptions will immediately trigger a surge in fuel prices. And, unfortunately, such a scenario sounds like the most likely outcome, as of January 1, 2020.
The alternative marine fuel compliance solutions including installation of scrubbers or switching to new eco-fuel (LNG) have not yet been a widely accepted practice across the sector. And this is despite the active advertising campaigns and tough administrative measures aimed at development of appropriate infrastructure, primarily in Europe.
Accordingly, shipowners will have to operate on available (and the most expensive of all types of bunker fuels) low-sulfur MGO LS and hope that the market will nevertheless respond quickly enough to dramatically changed conditions, and the growing demand for low-sulfur products will be at least partially satisfied. Another "option" to solve the problem is... to continue to use HSFO in violation of the restrictions, in hope that one will escape and not be caught. It sounds quite realistic, given that according to some forecasts, up to 40% of all commercial vessels in service may choose this option. However, there is a counter-measure to this illegal practice already at hand: a global ban on transportation of high-sulfur marine fuels comes into effect as of March 2020, if the vessel is not outfitted with a scrubber. And how effective it will be remains to be seen.
If we remember the history of ECA 1 in Northern Europe, the low-sulfur ULS FO with sulfur content up to 0.1% appeared in the market only 3 to 4 months after the emission limits came into force. How long the market will need to adapt to new conditions this time is highly questionable, especially given the global nature of the restrictions.
- How things are going with LNG bunkering: what infrastructure facilities have been put into service, which are being built and designed?
- In recent years, the LNG as bunker fuel agenda has been broadly discussed. Overall, the infrastructure of LNG terminals is present today in almost all regions of the world. However, such facilities availability do not mean it will be possible to conduct LNG bunkering operations there, since it is necessary to create a special transfer system for delivering the product on board the LNG-powered ship. Accordingly, as DNV GL study shows, there are only 49 dedicated LNG bunker terminals in the world plus 20 under construction, which greatly limits the development of the LNG bunker infrastructure. LNG bunkering can also be carried out ship-to-ship from a bunker vessel (currently there are 16 such ships in service), truck-to-ship from gas tank trucks (43 units) and from LNG tanks (31 units). In general, the development of LNG bunkering infrastructure in the world is proceeding at a very slow pace, and it is not yet possible to talk about a breakthrough after January 1, 2020.
- How is the LNG fleet developing? Existing ships and under construction ones. Outlook?
- The development of LNG fleet is directly related to the availability of LNG bunkering infrastructure. It was assumed that the emergence of new LNG-powered vessels will give new impetus to the development of LNG bunker stations and vice versa. In part, this can explain the rather optimistic forecasts for the development of the LNG fleet, which were made several years ago. At first, it was predicted that up to 1000 LNG-powered ships would be available by 2020, then this figure dropped to 400-600 units... We believe that even this figure is an overestimation. At the end of 2018, there were 126 vessels in operation, 47 units under construction and 68 confirmed orders. Total: 241 ships. For comparison, in 2016, there were 97 LNG-fueled vessels in service, in 2017 – 119 units. As you can see, the growth is not very impressive. According to DNV GL forecast the total number of LNG-fueled ships in all three categories (operation-construction-order) will reach 297 units by the end of this year. With such trend, one can hardly expect a boom in the development of LNG bunkering infrastructure. At the same time, one should not forget that in Europe, the creation of LNG bunkering infrastructure is backed by the Economic Commission for Europe, quite a powerful administrative resource. In line with the development program of the European transport network, it is planned that LNG bunkering will be available in 140 ports in EU. The readiness of the port infrastructure deadline is 2020, of inland ports — 2025.
In general, the process of transition of the global fleet to new environmental marine fuels, and above all, to LNG, is slow but gains pace. It is likely that the gradual tightening of emissions limit requirements encourages the development of LNG bunkering infrastructure and the creation of new LNG-fueled vessels. Over the past few years, MABUX has been a media partner and a consultant partner for a number of LNG projects in Europe and has been taking steps to promote LNG as bunker fuel. One of these steps was the creation of a page on MABUX new digital platform dedicated to LNG bunkering. Clients can find the gas and crude oil futures trading used to calculate the cost of LNG as bunker fuel, price relative indices LNG / MGO and LNG / ULSFO for Northern Europe, as well as the updates on development of LNG bunker market.
Sergey Ivanov is one of the invited speakers at the 12th All-Russian Forum Current State and Prospects for Development of Russian Bunker Services Market to be held June 27-28, 2019 in St. Petersburg. The topic of his report is “The State of the World Bunker Market in H1 2019 and the Outlook for LNG as Bunker Fuel”.
By Olga Bogacheva