Drewry: Low-Sulphur Fuel to Cost 30% More Than the Current Fuel

ShippingIllustration; Source: Pixabay under CC 2.0 license

Early indications of prices for low-sulphur fuel oil 0.5% compliant with the IMO 2020 rule showed that the new fuel costs about 30% more than the current, high-sulphur IFO380 fuel at Asian ports which have started selling it.

According to shipping consultancy Drewry, the price is based on actual bunkering transactions for ships which trade with Chinese ports, where the 0.5% requirement is already implemented. The low-sulphur fuel price in the major port of Singapore is about USD 560 per tonne.

However, industry players should be careful when using these early price indications, because the demand for low-sulphur fuel will increase considerably by November/December and market conditions will be very different then.

Namely, Drewry predicted that bunker adjustment factors (BAFs) will soar between the fourth quarter of 2019 and the first quarter of 2020, first, and “will be very volatile in the first half of 2020.”

Contractually, the ability of shippers and providers to adjust their BAFs at an appropriate time towards the end of 2019 and at a fair cost is a top priority for the next few months.

Shippers who have redefined their BAFs and their bunker indexing mechanism to take into account the IMO 2020 change have nearly always agreed that carriers need to be compensated for the price differential between low-sulphur and high-sulphur fuel – even though some 5% of total capacity is equipped with scrubbers.

“We believe that the chances are that low-sulphur bunker prices will, after increasing in 2020, fall in 2021 and 2022, as the initial price premium decreases,” the shipping consultancy noted.

But there will be several major indirect repercussions from the switch to low-sulphur fuel regulations, such as that shippers will pay a lot more attention and scrutiny to the BAFs than in the past, while smaller ships – which tend not to be equipped with scrubbers or with efficient engines – will be shunned by carriers even more than in the past.

Additionally, some aggregate ship capacity will be scrapped and shipowners will incur capital losses on some of their now-obsolete vessels, built at a time when pollution regulations were lenient. Paradoxically, shipping lines with a high use of scrubbers will be able to continue to buy a lot of high-sulphur fuel and will become more cost competitive and better insulated from low-sulphur price volatility than other shipping lines.

“The one remaining area of uncertainty is whether carriers will resort to more slow-steaming in the era of more expensive bunkers,” Drewry concluded.

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