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SMW 2019: IMO 2020 sulphur cap doomsday predictions ‘unfounded’

12 Apr 2019

Doomsday predictions surrounding the IMO 2020 sulphur fuel cap and the impact on container lines are unfounded, according to Alphaliner chief analyst Tan Hua Joo.

Speaking at the TOC Asia Container Supply Chain conference in Singapore on Tuesday (9 April), Tan poured scorn on claims of market chaos and carrier bankruptcies.

“This is the most important subject for the industry in the coming months,” admitted Tan.

“But there’s been some pretty catastrophic predictions being made, and while there’s a lot of uncertainty on IMO 2020, I don’t think these dire predictions are entirely justified.”

For example, he said estimates of the new regulation costing up to US$50bn were overblown, and instead placed the cost at around $10bn on an annualised basis, adding that this would be the “top end and the likely cost will be much lower”.

Furthermore, Tan said, carriers have shown resilience in the past in overcoming some major challenges wrought by new regulations. The build up to the Sulphur Emission Control Areas (SECAs) in 2015 and the VGM container weight regulation in 2016, for example, both entailed similar confusion and apparent lack of preparedness – but nonetheless both events passed with almost zero market disruption and high compliance, he said.

“Having said that, a $10bn bill is still an extremely large one for the industry to bare, and it’s suddenly the costliest IMO rule that’s ever been attempted,” he added.

The biggest point of uncertainty remains the cost spread between the new low sulphur fuel oil (LFSO) and the current heavy fuel oil (HFO). Tan pointed out the current spread between HFO and the 0.1% sulphur fuel required for SECA – which is significantly less than the 0.5% global cap from IMO 2020 – is around $200.

“And the cost of producing 0.5% LFSO is very likely much lower than for the 0.1% spread,” he explained, cautioning that initially it could be higher since it will take time for the new fuel’s supply and demand dynamics to level out.

“Any teething problems will be resolved relatively quickly and certainly within 12 months, and I expect the spread to become significantly below $200.”
Plus, Tan noted, three years ago HFO costs were at $600 per tonne compared with the current $400 per tonne, meaning there is room for the industry to absorb the extra costs on the horizon.

Another key factor at play is carrier uptake of scrubbers, with demand for the exhaust gas cleaning systems – which allow carriers to continue burning HFO – surging in recent months after an initial period of inertia, according to Tan, who said the “economics of scrubbers are too compelling that even Maersk changed its mind on them”.

He added: “Right now there’s a real sense of urgency from ship owners to take action and scrubber orders are constantly increasing. Based on the data we’ve collected, more than 20% of global container capacity will be on ships with scrubbers installed by the end of 2020 – which is much higher than initial predictions of 5-10%.”

One potential danger of the increased scrubber uptake is how carriers will react if the fuel cost spread is higher than expected.

“If the spread turns out to be higher than I predicted then those who do have scrubbers will have a significant cost advantage – how they’ll use this advantage to price and gain market share remains to be seen,” he warned.

Interestingly for shippers, perhaps, is Tan’s assertion that carriers are down-playing their scrubber strategies so as not to disturb the narrative on the need to recover the higher fuel costs from customers. He claimed carriers’ bunker adjustment factor (BAF) formulae are not transparent, since most are based on 100% usage of LSFO and don’t take into account scrubber usage.

Tan said one bonus for carriers from the increased scrubber uptake is the resulting temporary reduction in capacity, with vessels requiring 30-40 days in a ship yard for a retrofit.

In 2019, 200 ships totalling 2.4m TEU in capacity will be removed from the market for scrubber installations. This translates to 30 ships per month, or 300,000 TEU representing 1.3-1.5% of total global capacity.

“It’s not a big number, but anything that reduces supply is positive news for the shipping lines at this point,” he noted.

Source: TOC Asia
Photo credit: TOC Events Worldwide
Published: 12 April, 2019


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