After a Tough 2016, What Can The Bunker Industry Expect in 2017?

Friday January 6, 2017

"2016 hasn't been fun, and I think 2017 could be worse." That's what one source told Ship & Bunker at the end of last year, and it speaks to how many in the bunker industry are feeling as we begin 2017. But with change comes opportunity, and there is also quite a bit of optimism out there. Here, then, we take a look at what some of the key drivers and talking points will be for the bunker industry in the year ahead; one that promises to hold more challenges, and more uncertainty for the industry than any year before it.

Restructuring

The bunker market is changing, and this reality seemed to hit home at the end of 2016 with several companies announcing staff cuts and office closures as they looked to restructure. Many others who were doing the same did so much more quietly. But with sources last year telling Ship & Bunker that traders who need margins of $3-$4/mt were doing business for as little as $1/mt, it is easy to see why this change is needed.

"The truth is a lot of people have been hired to deal with a volume that's no longer there," the CEO of a well-known bunker company told Ship & Bunker.

We can expect more of this restructuring in 2017.

Some see this as a sign that the "next OW" is coming, but as Ship & Bunker has previously underlined there is little to suggest this is the case. Rather, this year it looks to be the Trim Reaper, not the Grim Reaper, making the rounds. In fact, such moves have been quietly, but widely applauded by the industry and the companies restructuring stand to be not only stronger but better placed to deal with what are expected to be tough market conditions in 2017.

Good to note too that this is genuine restructuring. While there is plenty of "trimming" taking place, companies will be just as keen to expand into areas where they see potential. Expect to see announcements from the companies who do.

And as players seek to be as competitive as possible do not be surprised if we see some diversification too, in particular with traditional traders looking to get physical.

The Journey to 2020 and the 0.50% Max Sulfur Cap

At the end of October the International Maritime Organization (IMO) announced that a 0.50 percent global sulfur cap on marine fuel will be implemented from 2020, rather than the proposed delayed date of 2025. As a result, this year we can expect to see increased debate over the merits of each of the main compliance strategies, namely, LNG bunkers, scrubbers + HFO, or simply burning inherently compliant bunkers.

For LNG, low oil prices have contributed to a slower than previously expected uptake of gas bunkers, but for 2017 we should nevertheless expect to see the continued development of LNG bunkering infrastructure and standards. And with this year expecting to see a continued recovery for crude prices and with it, a strengthening of the LNG bunker business case, 2017 will be another year to watch for gas bunkers.

Scrubber uptake, outside of the cruise industry, has been relatively low to date, but with the 2020 date now set this year we can expect scrubber manufacturers to begin a renewed push for the technology's adoption. With the economics of scrubbers having been declared a "slam dunk", this year we can expect the debate to focus more on scrubber waste management, and reliability and maintenance.

But perhaps one of this year's most important 2020 talking points will be about enforcement of the new rules. There have already been several high-profile calls for clarity on this matter, along with warnings that without proper enforcement there will be little compliance. Ship owners, especially the smaller ones, have little to gain from investing in a compliance strategy until they know how the new rules will be policed, so expect to see this issue being pushed throughout the year.

Rising and Volatile Bunker Prices

Oil prices were not only low at the start of last year, fuel oil prices were also relatively much lower compared to crude than usual - down at around 50 percent of the crude cost in some of the major ports, compared to a more typical 70-75 percent. This meant bunker prices in early 2016 were much lower than they would have otherwise been.

Fast forward to today and, overall, crude prices rose over 50 percent in 2016, but the recovery in fuel oil prices meant that by year end bunker prices in some of the world's major bunkering ports doubled year-on-year.

As we begin 2017 the much lauded OPEC oil output deal comes into force which, if respected, analysts expect crude prices to be lifted to around $60/bbl. Some analysts are even talking of the possibility of $100/bbl crude by the year's end, but this is definitely the minority view.

That said, almost everyone expects there to be cheating of some kind; the question is whether the cuts that are made will be enough to support prices.

There is also huge uncertainty over US shale production and what the impact of president-elect Trump will be, who has promised to usher in an "American Energy Renaissance" of sorts. But at present, most of the more respected crystal ball gazers seem to think that whatever happens, it should all add up to crude prices in the $50-$60/bbl range for 2017. This, in turn, should put bunkers in the Primary Ports in the low to mid $300/mt range.

Credit and Shipping Markets

2016 was a tough year for credit managers, and while there is optimism for improving conditions in shipping markets, 2017 nevertheless promises to be another tricky year.

Last year started with dry bulk rates at historic lows, and the collapse of Hanjin underlined just how bad things had become in the box markets. Alphaliner recently labelled 2016 as "the worst year on record for the container charter market."

But dry bulk is looking in much better shape than it was, and the sector's key barometer of the Baltic Dry Index Thursday stood at 983, up from the all-time low of 290 set last February. But BIMCO has already warned that a significant amount of new tonnage is set to enter the dry bulk market both this year and next, so an ongoing scrapping regime will be essential to avoid a return to more turbulent times.

Analysts are also expecting box markets to improve slightly this year, and one recent positive is that fleet growth at the end of 2016 was lower than demand growth for the first time since 2010.

2016 was a notable year in terms of mergers within the sector, and analysts are expecting carriers' prospects of survival to be helped by further consolidation moves in 2017. But with bunker prices having doubled over the course of last year, they face increased headwinds from those rising fuel costs.

As for the Tanker markets, which were booming when oil prices were rock bottom, for 2017 they face a less prosperous year. "We foresee demolition of tanker capacity to reach a five-year high, but not enough to prevent the onset of a loss-making freight market," BIMCO wrote in its 2017 Outlook.

Singapore Mass Flow Meters and Bunker Volumes

2017 has already been a historic year for the industry as Singapore, the world's biggest bunkering port by volume, from January 1 now requires the use of a mass flow meter (MFM) for MFO bunkering - the first port in the world to do so. Early signs are that things are going well, and local players have told Ship & Bunker that accuracy of the MFMs is proving to be 5 times or more accurate than the official "uncertainty measurement" of +/- 0.5 percent.

However, Ship & Bunker has also been told that this level of accuracy is generally in relation to larger stems, where there is a longer period of time where fuel is flowing at the highest rate of throughput. Smaller stems, we are told, are not producing quite the same results, so it remains to be seen what level of performance will be achieved as a whole in 2017.

Another factor to the success of MFMs is how often volume disputes take place and how they are handled. While Ship & Bunker is aware there has already been at least one such dispute, the Maritime and Port Authority of Singapore (MPA) has gone to extraordinary lengths to make sure MFMs are a success, so it should be no surprise that the record here has been excellent. So while we should not expect any surprises, it will still be an area to watch.

It is also predicted that the mandatory use of MFMs will push up bunker prices in Singapore, which in turn could shift volumes to either OPL bunkering or other markets altogether. Opinion differs as to how much shift will actually take place and what the resulting impact on volumes will really be, and the first indications will come in mid-February when the MPA releases the official bunker sales volume data for January 2017.

One thing that is clear is that Singapore's continued position as by far the world's biggest bunkering port by volume is not in doubt. Having set a record volume of over 45 million metric tonnes (mt) sold in 2105, the record will be broken again in 2016. MPA will reveal by how much when the final total for 2016 is released later this month, but a volume of around 48 million mt is likely.

This month MPA will also name Singapore's top bunker supplier by volume, and this year will be of particular interest given that Chemoil International Pte Ltd (Chemoil) took the honours last year, displacing BP Singapore Pte Ltd (BP) who had held the number one spot for the previous 11 years.

A Digital Future?

Back in 2014 MPA said it was looking into the idea of electronic bunker delivery notes (E-BDNs), and last October Ministry of Transport Ng Chee Meng, speaking to delegates gathered for SIBCON 2016, said Singapore would be rolling out E-BDNs in 2018. These will replace the current paper-based system.

"The E-BDN will enable immediate information transfer to the supplier and the customer, improving efficiency for all parties," he said.

Industry sources have told Ship & Bunker that they spend around $190 processing a paper BDN, which suggests that players in Singapore alone spend some $7.6 million per year processing such paperwork. In a world where every dollar counts, the attraction of digitalizing the bunker process in terms of cost savings alone is clear then. But such technology also promises not only to speed up the entire process (meaning, for example, invoices get sent out quicker) but it promises to give much greater insight into the bunker market thanks to the inherently improved data collection process that digital bunkering provides.

Let us not forget too that the International Maritime Organization (IMO) in November adopted a mandatory fuel consumption data collection system for international shipping. From 2019 the new Regulation 22A on collection and reporting of ship fuel oil consumption data will require ships above 5,000 gross tonnage to collect and report data to an IMO database. The prospect of undertaking such a task without the use of digital bunkering technologies seems unpalatable at best.

It will come of no surprise then that MPA are not the only ones looking to utilise such technologies, and in October U.S. and Canada-based Vortex Development Group (Vortex) launched its Digital Bunker framework. The start-up has already caught the attention of Port Authorities and bunker industry players alike during the showcasing of their E-Ship Safety, E-Stem, and E-BDN modules at industry events throughout last fall.

While it's clearly early days for such technology, industry watchers can expect to be reading a lot more about digital bunkering in its various forms throughout the coming year and beyond.

OW Bunker (Still!)

Last year there were some important developments as part of the ongoing fallout from the collapse of OW Bunker. Firstly, the UK Supreme Court upheld that the Sale of Goods Act 1979 (SoGA) did not cover contracts signed with OW Bunker in the so-called "Res Cogitans" OW Bunker UK test case, but rather the contract with OW Bunker simply gave entitlement to use the bunkers, and required them to be paid for. This also left the door open for bunker buyers to potentially have to pay twice for the same bunkers.

More surprising were developments in the U.S. where a number of rulings found that under the U.S. Commercial Instruments and Maritime Lien Act (CIMLA), neither the physical supplier or ING Bank (ING) as OW's assignee meet the criteria for a maritime lien as part of their efforts to recover bunker costs. This also raised the prospect that in fact no-one in the supply chain was entitled to a lien. While this does not change the appropriate parties' entitlement to be paid, it obviously raises serious questions as to what tools they have available to recover monies in the event of a dispute.

As a result of both the UK and U.S. developments, for 2017 we can expect more related legal wrangling and, particularly in the U.S., potentially industry influencing legal decisions being made.

Wild Cards?

Japan last month approved a record $44 billion defence budget along with a historic military intelligence sharing pact with South Korea, moves widely seen as an escalation of tensions with China, particularly over territorial disputes.

Meanwhile, Trump, not even in power yet, has been cozying up to Putin and also upsetting China. Right now it might all be just a war of words, but there are genuine and understandable concerns that key nations are moving to a war footing that could result in real conflict. If that happens, you can forget everything you've read about oil price predictions and market demand for 2017.