On January 1, 2020 the International Maritime Organization (IMO) implemented new fuel standards for oil-powered vessels, except those equipped with exhaust scrubbers to remove pollutants. In the absence of a scrubber, the IMO 2020 rule stipulates that ships' bunkers contain less than 0.5% sulfur. Using a scrubber allows the vessel to burn cheaper high-sulfur fuel. Last March, a shipowner’s estimated $2.5 million scrubber investment for a 2-MMbbl Very Large Crude Carrier (VLCC) would take just over three years to recover, based on average fuel prices during the first quarter of 2019. This year, barely a month after the new regulation came into force, the payback period has shortened dramatically, to less than a year, though the coronavirus’s effect on shipping demand and fuel prices, among other factors, could again put payout timing at risk. Today, we look at changing price spreads between high-sulfur and low-sulfur bunker and the scrubber payback economics that suggest a rosier outlook for vessel owners who invested in scrubber installations, at least for now.
This blog is based on research from Morningstar Commodities. A copy of the original report is available here.
As we’ve explained in multiple blogs in the RBN blogosphere, (see our Thunder Rolls blog series), the IMO 2020 regulation that took effect on New Year’s Day is the culmination of a series of standards set in motion in October 2008, and is expected to dramatically lessen demand for high-sulfur fuel oil (HSFO) and, in the process, upset refinery economics around the globe. In 2018, that bearish market view of HSFO after 2020 was reflected in lower forward curve prices — the thinking at the time was that the discounted cost of high-sulfur fuel would encourage more vessel owners to invest in scrubbers to allow them to continue using cheaper, noncompliant fuel, justifying their investment through the savings. But the shortage of heavy crude oil in 2019 reversed that expectation, throwing a curveball at the economics of installing scrubber technology.
When we calculated the timing of scrubber paybacks in Just Can’t Get Enough nearly a year ago, in March 2019, price spreads between low- and higher-sulfur fuel oils had narrowed in the wake of changing fundamental and geopolitical circumstances. The price premium for clean-burning 0.5% sulfur marine fuel oil over high-sulfur bunker fuel at the U.S. Gulf Coast had declined steadily, from nearly $11/bbl in early January 2019 to less than $2/bbl during the first week of March 2019. This, despite the impending IMO 2020 regulation that was expected to widen the spread between low- and higher-sulfur marine bunkers as traders bet that demand for high-sulfur fuels would evaporate in the runup to the new rule. That reversal of market sentiment followed a shortage of the heavy crude that Gulf Coast refineries are configured to process, due to OPEC production cuts and lower output from Venezuela and Iran. At the time, we determined that the average $43/metric ton (MT), or $6.62/bbl, low- to high-sulfur spread during the first quarter of 2019 would have left scrubber owners waiting 3.1 years for their investment to be recouped. Immediately after the IMO regulations came into force, compliant low-sulfur fuel prices skyrocketed, and heavy-sulfur bunker prices tanked, causing the spread to widen to an average $234/MT, or $37/bbl, for forward deliveries at the Gulf Coast during January 2020, according to CME Group. Since then the spread has narrowed as low-sulfur fuel prices returned to earth and the coronavirus has battered shipping demand.
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