The decision by the International Maritime Organization Thursday to lower the global sulfur limit of marine fuels at sea to 0.5% would have a profound impact on the fuel oil and bunker fuel market, but most likely not until the change is enacted in 2020, bunker fuel suppliers and shipowners said.

Ships outside emissions control areas can burn fuel with a maximum sulfur content of 3.5%S. That will change come January 2020, which sources said would likely leave shipowners scrambling to find a new source of fuel that will meet environmental standards set by the IMO.

Bunker suppliers and shipowners switched from using a dirty low-sulfur bunker fuel to marine gasoil at the beginning of 2015, when the maximum sulfur content in the North American Emissions Control Area was lowered to 0.1%S from 1%S.

Some bunker suppliers created a “dirty gasoil” that had some fuel oil blended in with diesel or heating oil, but sources said differing blends from suppliers scared shipowners worried about a potential chemical reaction when combining different streams of dirty 0.1%S fuel oil. As a result, the market largely adopted buying MGO and burning within the ECA.

Some sources said they believed the global shipping industry would largely follow suit and burn diesel in 2020, though it would likely have sulfur content closer to 0.5%S.

“We’re working on models to compare installing scrubbers versus using low sulfur fuel,” a shipowner with vessels active worldwide said. “You have to consider a crash in fuel oil prices ahead but using all distillate doesn’t make sense either – that would be too expensive.”

The shipowner added, “Getting enough supply (distillate) is biggest problem we see right now. There’s no question marine gasoil margins will improve, but will enough refineries upgrade to meet demand? Right now that demand couldn’t be met. Also, we feel there are too many incentives to cheat since it will be hard to enforce compliance in the open ocean.”

A source at an Asian-based trading house said, “The effect of the new emission limits are really up to the freight market. If higher fuel costs aren’t reflected in the freight market, several shipping companies will face a serious situation because they won’t be able to convert their vessels easily for a scrubber set-up. It takes time and lots of money. I think almost all owners will choose low-sulfur grade fuel”

Another source with a shipowner said he did not see other owners rush to scrap vessels instead of retrofitting the ships.

“I’m not sold on the idea that ships will scrap in a way that will have a material impact to the market,” he said. “Perhaps the combination [of new sulfur requirements] with the ballast water rules will spur scrapping. But as far as the change in bunkers regulations alone, I don’t see that being the deciding factor for scrapping.”

The shipowner source also said that switching to MGO is not that difficult.

“As it stands any ships that trade in the West and areas of China consume distillate bunkers while in the emission control area zones,” he said. “So, there are no technical issues with consuming distillate bunkers for most ships.”

One thing that all sources agree on is that it’s too soon to see much of a change in prices. Marine gasoil in New York was assessed $4/mt higher at $475.50/mt. The same product in Los Angeles was assessed at $537/mt, $2/mt higher on the day.

Source: Platts

Ships outside emissions control areas can burn fuel with a maximum sulfur content of 3.5%S. That will change come January 2020, which sources said would likely leave shipowners scrambling to find a new source of fuel that will meet environmental standards set by the IMO.

Bunker suppliers and shipowners switched from using a dirty low-sulfur bunker fuel to marine gasoil at the beginning of 2015, when the maximum sulfur content in the North American Emissions Control Area was lowered to 0.1%S from 1%S.

Some bunker suppliers created a “dirty gasoil” that had some fuel oil blended in with diesel or heating oil, but sources said differing blends from suppliers scared shipowners worried about a potential chemical reaction when combining different streams of dirty 0.1%S fuel oil. As a result, the market largely adopted buying MGO and burning within the ECA.

Some sources said they believed the global shipping industry would largely follow suit and burn diesel in 2020, though it would likely have sulfur content closer to 0.5%S.

“We’re working on models to compare installing scrubbers versus using low sulfur fuel,” a shipowner with vessels active worldwide said. “You have to consider a crash in fuel oil prices ahead but using all distillate doesn’t make sense either – that would be too expensive.”

The shipowner added, “Getting enough supply (distillate) is biggest problem we see right now. There’s no question marine gasoil margins will improve, but will enough refineries upgrade to meet demand? Right now that demand couldn’t be met. Also, we feel there are too many incentives to cheat since it will be hard to enforce compliance in the open ocean.”

A source at an Asian-based trading house said, “The effect of the new emission limits are really up to the freight market. If higher fuel costs aren’t reflected in the freight market, several shipping companies will face a serious situation because they won’t be able to convert their vessels easily for a scrubber set-up. It takes time and lots of money. I think almost all owners will choose low-sulfur grade fuel”

Another source with a shipowner said he did not see other owners rush to scrap vessels instead of retrofitting the ships.

“I’m not sold on the idea that ships will scrap in a way that will have a material impact to the market,” he said. “Perhaps the combination [of new sulfur requirements] with the ballast water rules will spur scrapping. But as far as the change in bunkers regulations alone, I don’t see that being the deciding factor for scrapping.”

The shipowner source also said that switching to MGO is not that difficult.

“As it stands any ships that trade in the West and areas of China consume distillate bunkers while in the emission control area zones,” he said. “So, there are no technical issues with consuming distillate bunkers for most ships.”

One thing that all sources agree on is that it’s too soon to see much of a change in prices. Marine gasoil in New York was assessed $4/mt higher at $475.50/mt. The same product in Los Angeles was assessed at $537/mt, $2/mt higher on the day.

Source: Platts