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And we thought IMO 2020 would be challenging…

Adrian Tolson, a director at BLUE Insight, sets the scene for a webinar he’s hosting on Wednesday.

Remember the good old days when we thought IMO 2020 would be challenging? Little did we know. Covid-19 has generated the most rapid shift in global economic health ever seen – triggering a collapse in oil prices and a crisis in shipping markets – and rendering concerns around IMO 2020 as seeming almost inconsequential.

Clarksons recently predicted a 5% contraction in shipping in 2020, but that is increasingly looking like a conservative assessment. Bunker demand will reduce; shipping contraction means lower freight rates and problems for containers and dry bulk, yet the tanker market is clearly the one outlier, and a boon looks likely for a sector that has suffered in recent years.

Yet, if the economic ripple effects of Covid-19 desist sooner than anticipated we could see tanker rates take a severe blow. This risk will be further exacerbated should oil production ease significantly, which will see rates drop. However, if Covid-19 persists in continuing to lock down societal and economic norms, and oil keeps flowing, then expect it to be a great year to operate tankers.

Conversely, for the dry bulk, container and cruise sectors, the picture is bleak. Recent M&A activity in the liner sector undoubtedly offers some protection, but it would not be a surprise to see bankruptcies; we all expected the Korean government to bail out Hanjin, but they didn’t. Nevertheless, we should anticipate that national governments will protect key shipping companies (noting that the US government wants to help the cruise industry, for example).

From the perspective of the bunker markets, the spreads of almost $300 per tonne enjoyed by gleeful shipowners with scrubbers installed in January and February 2020 have disappeared – replaced with differentials in main ports of below $50 per tonne at the time of writing. So the focus with most buyers is now on buying VLSFO. Those who have installed and paid for scrubbers will naturally still try and buy HSFO where available, but with overall prices and spreads low, we are seeing a seemingly unthinkable scenario in January, where even shipowners with scrubbers are almost ambivalent as to whether they take VLSFO or HSFO.

Certainly no one is going to invest in scrubbers in this climate, and some who have invested will surely regret their decision. Scrubbing economics were already showing weakness before Covid-19 as it became apparent there was less HSFO available coupled with reports that some suppliers in small ports were charging very high prices with large margins for HSFO supply. So it’s my view that, even without the COVD-19 triggered collapse in oil prices, we would be looking at a smaller market for scrubbers.

Conversely, at least there is demand for VLSFO (there is no demand for gasoline) – and we are seeing refiners face a direct choice between processing vacuum gasoil (VGO) into gasoline or sending it into the VLSFO pool – a factor that has already depressed VLSFO prices a little. Overall there appears to be plenty of product.

It remains to be seen whether the collapse of Hin Leong in Singapore will be the tip of the iceberg and we will see other suppliers and, or traders fall. The Singapore MPA’s decision to assure the market that bunker supply chains were intact – amid genuine concerns that banks will pull financial liquidity from the supply chain – and approve bunker licenses for Trafigura and Mercuria (Minerva) to fill the Hin Leong supply gap, tells its own story.

From a bunker fuel quality perspective, Covid-19 and its effects may ironically improve quality, as we will see better streams coming ex-refinery and probably less incentive to push blended fuels. While, on the other hand, much of the initial quality of VLSFO was good coming from straight run low sulphur residual fuel. VGO, which we are seeing refiners push into the ‘bunker pool’ frequently now, is likely to be more problematic from a compatibility and stability point of view.

One could be forgiven for forgetting shipping’s new, even bigger, challenge; decarbonisation, and the need to explore new low and zero carbon fuels and energy. I like to think that this rare period of reflection afforded to us can stimulate an ‘intelligent recovery’ that sees less business as usual, and allows markets to pivot. Signs were certainly there for shipping pre COVID-19, and sensible investors in shipping will recognise this. That has to be the hope, and there are signs to this effect in other sectors.

Adrian Tolson will be joined by Jan Christensen, senior director purchasing and supply at Hapag-Lloyd and Charlotte Rojgaard, technical manager for marine fuels at Bureau Veritas on Wednesday to discuss these issues. Click this link to find out more about this free webinar.

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