Y2K20

So finally it seems IMO will go ahead with its Sulphur Cap Compliance regulation whereby, ship's would have to be fed on LSFO with sulphur contents less than 0.5% from existing HSFO having 3.5%. In layman's lingo hyenas of energy jungle would be asked to consume fresh flesh instead of rotting carcass.

As per EIA data, half of the 8mbbld high sulphur fuel oil produced by the worldwide downstream refineries is consumed by the ships. Come 2020, 70% of the demand for this product will fall which would bring a great imbalance in demand, supply and prices of this product. The impact would be severe and felt by the entire sphere of producers and consumers.

Impact on Upstream: Demand for Sweeter crude will be higher and thus the price differential between sweet and sour crude will widen. MEG producers stand to lose more than the western producer of sweeter crude.

Impact on Downstream: Refineries without Coker/ hydrocracker unit producing higher amount of HSFO will see shrinking profits and building inventories of the lower grade fuel. US refiners are less vulnerable than the rest.

Impact on Bunker prices: There will be huge differential between the prices of  HSFO and LSFO/MGO.

Impact on Ship Owners/ Shipping market: The operating cost will increase tremendously due to high priced bunkers. Thereby hitting the profitability. Small owners will be at potential risk of not bearing the operating cost so they will prefer timechartering their units instead of performing Voyage charters. Timecharter rates will drop. Freight rates will be much higher. 

Impact on Charterers: Obviously the cost of fuel will be passed on to the charterers of ships or receivers of the goods.

Impact on world economy: This premium on bunkers will in turn kick up the commodity prices in general and a wide spread inflation. Higher rate of inflation will inspire higher interest rates which in turn will subdue demand, stock markets and world economy.

Apart from shifting to higher grades of bunkers there are two more alternatives given to the ship-owners/operators for compliance of the rule. First is to install scrubber system onboard while using baser grade and the second is to use alternative marine fuels like LNG or methanol etc.

Whereas, the alternative fuels fail on accessibility and availability issues, I find installing scrubbers onboard as the best solution for the tramp ships. It is logical to upgrade the digestive system rather than limiting your dietary choices. However, it has not found favours with majority of owners as it is expensive and results in layoff days in a repair yard.

Disaster for some means opportunity for some. Sweet crude producers, full conversion refineries with high complexity rating, advanced engineering and technology companies making scrubbers etc are all set to gain out of misery of ship operators. Besides these, the defaulters and cheaters will make a killing as always.

However, severity of the impact is subject to the sincerity or strictness with which the regulation is complied with. In present scenario, the authority to enforce IMO 2020 rests solely with the flag state. Flag states neither do have adequate infrastructure, resources or will to enforce the law. Most of the ship owners, specially the small, have chosen to remain inertial banking on the fact. But winds of change are already blowing. All players in the game will have to evolve or else get exhausted.

Need to protect our environment for a better future at any cost.