Søren Høll, the Chief Executive Officer at KPI OceanConnect, on Monday (16 February) published an article on his company website sharing how marine energy procurement strategies need to adapt to prepare for the future:

This time last year VLSFO prices stood at highs not seen in many years. There were more than a couple of industry experts who believed that the IMO’s global sulphur cap might have enduringly created large HSFO-VLSFO spreads. If that wasn’t enough, rumours about quality management, fuel incompatibility, and adequate availability – mainly concerning low sulphur blends – heightened the industry’s nerves during those first two months in 2020.

This economic blow created by Covid-19 dominated the entire shipping industry, but no two bunkering hubs experienced it exactly the same. An example of this can be seen in Panama which has seen VLSFO sales increase since October 2020, but it hadn’t yet reached the pre-pandemic levels seen in January 2020. Whereas Singapore remains the world’s top bunkering port with sales amounting to just under 50 million tonnes in 2020 – its biggest gain in the last four years.

Expectations for 2021 and beyond

There were concerns that some regions wouldn’t have the capacity to supply enough distillate fuels to meet both domestic and maritime demand when IMO 2020 was first introduced. However, there’s been plenty of compliant fuels, as many of the usual major consumers of distillates on land suffered huge demand drops due to Covid-19.

Within OPEC+ there’s no reliable consensus over oil production. We therefore believe latent supply is likely to exceed actual demand for some time to come. In addition, numerous major oil producers, such as Venezuela, Iran, and Libya, remain functionally offline. Some agreements have now been made to reign in oil production – including Saudi Arabia’s planned 1m bpd cut – but we’re unlikely to see three-figure Brent prices soon.

Nevertheless, it’s becoming increasingly important for the industry to prepare for some of the risks highlighted back in 2019, which may surface in the coming months. Although we believe the severest predictions from those early weeks in 2020 are unlikely to come to pass, there will be consequences if oil prices climb. Many financial institutions have already predicted this situation, and with the huge volatility in bunker prices last year, we’re already seeing prices gradually rise. For example, VLSFO dropped to $150 per tonne in May 2020, but has since risen to the $400s and continues to increase.

There have been fewer quality issues than many analysts predicted, but this may have been partly masked by the pandemic and the depressed oil price. These challenges may rear their head once the world starts to recover from Covid-19, distillate demand increases in other industries, and if unscrupulous suppliers start using cheaper components for blending. As we saw in early 2018 from ships bunkering in Houston, these fuels might be ISO 8217 compliant, but they can still cause mechanical and safety issues.

Accelerating decarbonisation with consolidation

Our industry’s being presented with multiple pathways towards decarbonisation – all of which have unique challenges. What we do know is that over the next few decades, the marine energy supply chain will transform immensely. The shift towards future fuels and alternative sources is growing, and KPI OceanConnect will be alongside its partners during the transition, and ready to provide the industry with the energy it needs to run its fleets sustainably.

However, the transition won’t be easy. In 2020, we saw the increased costs of the new VLSFO blends, with smaller firms’ credit lines often struggling to cope with the higher costs. Although many predicted that IMO 2020 would drive a wave of consolidation, so far this is only part way, but there’s no shortage of M&A rumours.

At a structural level, the industry has also seen a decline in capital availability for all but the strongest players. Primarily this is due to many large banks, such as ABN AMRO and BNP Paribas, pulling out of commodity trade finance altogether. This has created additional costs, liquidity and transaction complexities for shipowners, as well as bunkering companies.

The role of the broker and trader is well placed here to help facilitate the marine energy transition. As traders, we provide not just fuels but also solutions and intelligence and we have a responsibility to help guide our partners through the transition to sustainable shipping and all associated challenges along the way. Implementing a comprehensive bunker procurement strategy to manage risks is crucial as we continue to endure price volatility in the immediate, if not long term.

Photo credit and source: KPI OceanConnect
Published: 17 February, 2021