IMO2020 and tanker rates

Nov 08 2019


Looking at the effects of the forthcoming IMO2020 regulations, only a small percentage of ships will have scrubbers fitted by the start of next year, a leading shipbroker and analyst said.

As a result, tanker rates will, at least initially, be driven by ships without scrubbers, burning more expensive low sulfur fuel, Poten & Partners claimed in an analysis of major trade routes. 

To examine the impact of the more expensive fuel, freight rates (in $/tonne) using the average HFO and MGO prices this year were compared with rates calculated using the average prices of MGO and very low sulfur fuel oil (VLSFO) using the 2020 forward prices.

As an illustration of the impact, an analysis for various types benchmark routes were taken. For VLCCs, TD3c (AG-Far East) was used; for Suezmaxes TD20 (West Africa-NW Europe) and for Aframaxes TD9 (Caribbean –US Gulf) were selected. In the clean sector, TC1 (AG-Far East) for large tankers and for MRs, TC2 (NW Europe to the US East Coast) were chosen.

It is believed that the increased fuel costs will be reflected in the freight costs paid by the charterer. The TCE revenue generated by owners will be similar to what it would be without the IMO change, assuming that TCE rates are set by ships supply/demand balance.

As a baseline for the calculations, Poten used the average TCE rates year-to-date for each of these routes. The average HFO price in Rotterdam was $326 per tonne, while MGO was $567 per tonne over this period. For 2020, Poten used the current forward curves: $657 for MGO and $476 per tonne for compliant LSFO.

It is interesting to see how the spread between the fuel types had widened over the past few weeks, as HFO prices started to decline ahead of the implementation of the new regulations, while MGO and VLSFO prices were more or less flat.

The forward curve showed HFO prices increasing gradually throughout the year, as more owners were expected to install scrubbers.

As an example, VLCCs earned $34,900 per day this year with an average bunker price of $326 per tonne. On average, a charterer would pay $10.52 per tonne of cargo for this voyage. In 2020, it is assumed that owners still earned the same but ships will be using more expensive VLSFO (at $476 per tonne), thus charterers would have to pay $12.22 per tonne, a premium of 16% over 2019 rates. If ships burn MGO, the transportation costs would increase further to $14.25 (+35%).

Poten said that in the longer run, more ships will use VLSFO, but initially a number of owners will likely use MGO until the situation with different suppliers’ compatibility becomes clear.

In addition, there probably will not be enough VLSFO available to supply all the ships needed by the start of next year.

As a result, rates could initially reflect the price of MGO, but gradually decline to reflect VLSFO, as this fuel becomes more common and possibly decline further if/when more owners install scrubbers and these vessels start setting the rates.

From a charterer’s perspective, it looks like rates will become significantly more expensive in 2020, especially for the larger vessels, which normally perform longer voyages where fuel represents a larger proportion of the freight costs, Poten concluded.

 



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