India's Bunker Suppliers Need More Than Small Mercies

Adrian Tolson, Senior Partner at 20|20 Marine Energy

Bunker deliveries are tax-free or tax exempt in almost all of the world's largest and most price competitive bunker ports. So when the Indian Government imposed an 18% Goods and Services Tax (GST) on all bunker deliveries on 1 July this year it not only derailed any latent potential, but killed existing demand in the process. For these reasons, last week's announcement that India's GST council has dropped the GST rate on bunkers to 5% has been greeted positively by most of the industry.

In reality, India's future as a bunkering hub depends on local bunker suppliers' ability to both source supplies from domestic or overseas refineries, and sell without import or GST taxation of any type. In this scenario, India's bunkering ports with their strategic location on the traditional west to east residual export route and their close proximity to Fujairah would be highly likely to benefit.

However Indian refineries do not fit well as suppliers in the pre-2020 bunker supply world. Fuel oil production is relatively limited, and bunker competitiveness depends on cheap imports and no taxation. India is much better suited to the post-2020 bunkering world in which distillates will dominate, and when the country's export refineries can provide cost-effective product for the local bunkering business.

While its certainly not as disastrous as an 18% rate, even at 5% it will give India at least a $16-17 per ton disadvantage on IFO to its competition in Fujairah or Singapore. Given that fuel costs account for 70% to 80% of total voyage expenses, the improved GST rate may help avoid the death of Indian bunkering. But it's unlikely to get it off life support, and won't do anything to encourage much needed investment in its long-term health.

The post-2020 bunkering world

In about 800 days on 1 January 2020, Indian refineries  will be in a far stronger position to support significant growth in the sub-continent's bunkering businesses. However, a 5% GST on distillate prices will add a significant cost disadvantage to Indian bunker suppliers, favouring exports over bunker sales and likely limiting growth at a time when its physical supplies should be expanding. The obvious solution is a tax-free GST environment.

California is a case in point. Los Angeles was once one of the world's premier bunkering locations. However, during the severe recession of the early 1990s, California, in a bid to raise funds, removed a long standing tax exemption and so imposes an 8.25% sales tax on bunkers. The impact was colossal. Bunker sales cratered from about four million barrels per month to barely one million in 1992.

Many owners and operators who had previously used Los Angeles's ports for bunker only calls to take advantage of its low prices swiftly took their business elsewhere as soon as the additional cost increase perton became due. They soon became accustomed to refueling in Panama, Singapore and South Korea instead, and even a reinsertion of the exemption on 1 January 1993 couldn't bring them all back. Even four years later, in 1997, sales totaled only 2 million barrels a month - or about half of what they were in the late 1980s.

If it follows California's path, Indian bunkering may never reach the potential that has long been envisioned, and we'll only have government and tax policy to blame.