First - beginning in 2020, the IMO will establish a global 0.5% sulfur cap in order to reduce shipping’s carbon footprint.
This may materially alter trade flows of fuel oil and middle distillates in 2020 and beyond, as a new bunker fuel blend containing fuel oil components and gasoil is expected to enter the market.
Considering the current global refining complex, East of the Suez markets are likely to be self-sufficient and meet regional demand, while Western markets with less complex refining systems (Europe, Latin America and FSU/Russia) will likely switch and become net importers of the new bunker fuel.
The Middle East is projected to produce 2.81 mill barrels per day of gasoil by 2020/21, which is 34% more than regional demand; therefore, we foresee this region as being a large export centre for gasoil, boosting tanker demand, McQuilling said
Middle East exports are likely to rise substantially to Europe, as well as potentially to more distant markets in the Americas. Assuming this new fuel will be classified as a clean product, we anticipate a material rise in tonne/mile demand for product tankers, with a bias towards larger tankers (LR2) for expected long-haul shipment requirements.
While the implementation date of 2020 appears to be set in stone, the possibility of an extension cannot be ruled out given the concern over the likelihood that global gasoil supply will not be enough to meet demand, the consultancy said. Today, the view taken by owners seems to be a ‘wait and see’ approach considering many uncertain factors remain, such as the availability and quality of scrubber technology, the composition of the new bunker fuel and what the supply/demand scenario for this fuel will look like.
Compliance remains a concern in the industry, as the current fines associated with violating ECA zone requirements remain considerably lower than the cost savings from using cheaper bunker fuel. Owners are also considering the use of scrubber systems in order avoid the use of the new bunker fuel, a move which could influence the pricing regime for the new fuel and therefore impact owner’s decision making.
Increasing use of scrubbers will likely lead to higher demand for HSFO, as opposed to gasoil and relieve pricing pressure on HSFO, decreasing the spread between these two options. With a narrower spread there is less of an incentive to install the system, particularly for vessels with a shorter trading life on the horizon. Only a minority of owners are expected to select scrubbers.
From McQuilling’s supply outlook, an accelerated level of deletions/scrapping may occur beginning 2018, likely supporting rates; however, this depends on how events play out.
Second - The regulatory environment is set to change this year with the implementation of the Ballast Water Management Convention on 8th September, 2017.
Owners of older ships must make the decision whether to take on the financial cost of installing a treatment system or scrapping the vessel. The cost of a system ranges from $500,000 to $3 mill depending on the size of the vessel.
A vessel approaching its 4th or 5th special survey may not have enough trading life left to offset the cost of installing the treatment system, therefore providing some incentive to scrap. As a majority of the vessels with surveys due after September, 2017 are on their 1st-3rd survey rounds, we do not see a significant amount of cost aversion-driven scrapping in 2018, McQuilling said.
At the IMO’s Marine Environment Protection Committee’s (MEPC) 71st session in July, this year, a proposal to extend the implementation date to 8th September, 2019 will be discussed to allow owners more opportunity to get drydockings and/or International Oil Pollution Prevention (IOPP) certification completed before the implementation date in order to obtain a waiver and delay the installation of the equipment. This will also allow owners to see if systems that are both IMO revised G8 and USCG Type Approved enter the market.
Of the world’s tanker fleet, 22.1% is due for special survey beyond September, 2017 through 2018, which could potentially contribute to temporary contractions in supply as vessels enter drydock. Short-term supply contractions could provide some support to rates throughout 2018, McQuilling concluded.