Steve Leonard has an extensive international background in marine and industrial fuels. Image Credit: Steve Leonard.
Ever since October 27, 2016, when IMO announced the it was going ahead with its MARPOL Annex VI regulation global sulfur cap starting January 1, 2020 a number of marine fuel suppliers, traders and service providers have published various reports on how ship owners might deal with the new regulations. One report, by S&P, summarized the decision as having left ship owners in "a tight spot" with among other things, "a sharp rise in fuel bills with no guarantee of consistent quality [and] the possibility of the status quo being upended again a few years later as regulators turn to addressing other types of emission." All of the publications to date have one common theme, namely, ship owners need to talk to their counterparties about the availability and price of fuel.
And therein lies the quandary: despite what we have read or heard, simply put, no one knows.
suppliers and sellers need to be mindful that the technical challenges brought about by 2020 will necessitate a much greater level of customer understanding when the new sulfur cap comes into force
A big part of the problem with the looming deadline is that very few stakeholders in the marine fuel supply chain have a strategy. It is a cat and mouse game, much like Jan 1, 2015, when 0.1% Sul was introduced in the Emission Control Areas. It was left until the last minute and, as fate would have it, luckily a number of unforeseen market factors converged to provide the necessary solutions for everyone.
Everyone is focused on the product compliance side of the 2020 challenge, but suppliers and sellers need to be mindful that the technical challenges brought about by 2020 will necessitate a much greater level of customer understanding when the new sulfur cap comes into force.
On the ship owner side, very few companies have indicated what they will do; hard to blame them given the lack of information. Maersk told Ship & Bunker it will focus on 0.5% Sul compliant fuels, and was also reported to have cancelled an emulsion fuel trial with Quadrise for this reason. Conversely, Carnival Cruise Lines, will proceed with abatement technology, having retrofitted, to date, over 65% of its 100 plus strong flotilla. One can't help but wonder if Maersk made this decision to stop everybody asking what their intentions are?
The focus of this article however, is what each supply chain participant might do as we approach 2020. If the implementation and verification aspects of the cap are to be enforced, which in and of itself is a separate discussion, the market will be assured of significant chaos.
Majors, Refiners, Suppliers & Traders
The majors have taken the lead, touting with a high degree of optimism that they will have an array of compliant fuels available in addition to LNG, methanol and other exotic and alternatives solutions all of which is likely true but certainly not practical before 2020 of even beyond.
Refiners in turn have not disclosed much on their high sulphur streams. Let's accept the notion there is no overnight solution for producing a 0.5% sulphur fuel and any talk of a change in crude slates or desulphurization is badly misdirected. There is a nagging, and yet unaddressed problem of course for refiners, which is what to do with the high sulphur fuel oil if the target audience is limited to those who install scrubbers on their ships? Sometime soon this will need to be addressed.
Global independent suppliers who own assets will be best positioned for 2020, but will likely require a fundamental change in their business models. It's going to become increasingly important to get the right fuel, rather than simply the cheapest fuel. Buyers will become increasingly aware of the difference between price and cost, a difference that will ultimately be dictated by service.
The regional and local suppliers will need to assess what fuels will be available, what the demand will be and what assets will be required to meet that demand, if in fact it does not disappear.
Which brings us to the Traders. It is the view here that the three largest traders have the most to gain with 2020. Simply put an opportunity is being gifted for which they need to step up their game and do so now. How, with so much uncertainty and so little information available? It won't be easy, but they need to start somewhere. Lack of information and direction is not an excuse. They need to come up with a "strategy" based on supportable data and common sense assumptions that can be quantified. To date no one has done this.
Strategy is not some esoteric, academic concept. Strategy rigorously defined and quantified, is about making choices that lead to sustainably superior performance. Follow Porter's five tests of a good strategy:
Ensure you have the right people in place and the right inputs. Exert discipline, creativity and be pragmatic. Understand the competitive landscape and the stakeholders.
Want to get a head start? Try looking at strategy as choosing what not to do.
Pick a unique value proposition. Which needs will you serve, which customers, at what relative price? Look to stake out a position that's different from rivals, but don't hesitate to include other stakeholders. This last part is important.
Tailor which activities pertain to the value proposition. This is less intuitive but pick activities you choose to do differently than your competition. This will satisfy the ability to charge premium prices or to operate at lower cost. Nothing more than quantifiable performance.
Seek out trade-offs: meaning saying no to some customers in order to better serve others.
Ensure your strategy fits the enterprise. Much like complex systems where all of the parts fit together seamlessly, look for ways of combining efforts with other stakeholders. This improves the bottom line and enhances sustainability and of course will keep out copiers.
2020 will create an efficient infrastructure and decisions will be made using automated data feeds. If this sounds like an all hands on deck signal, indeed it is. Time for the industry to come together.
Finally, equilibrium is most important. It is not necessary initially to change too much, as this risks changing too fast and possibly in the wrong direction. It helps in making make good choices, especially important in the years leading up to 2020. The right choices will strengthen adaptation, sharpen trade-offs, and enhance the fit. Balancing organizational behavior and resources is the challenge which requires participation of every functional area of the enterprise.
Not addressed in Porter's list is technology. There is a need to consider technology as means to an end. Ignore this and risk being left behind. The top three traders with their large global infrastructures have certainly gathered enough proprietary information by now. The rise in information data flow will force these traders to become more technology savvy and push the market to become more 'hyperliquid' with faster paced trading. Hyperliquidity, a term coined by the Boston Consulting Group, refers to the "ultimate state of commoditization, where a market's efficiency and transparency have reached their highest potential levels." After 2020, marine fuel will soon have a similar hyperliquidity as crude futures and forex.
Want to get a head start? Try looking at strategy as choosing what not to do.
All supply chain participants need to unite, provide solutions and as important, come up with a better way to communicate them. To date, what we have heard from the industry is nothing more than words with little or no substance.
Technology is challenging the archaic ways this industry is currently operating. Information is becoming highly standardized and accessible. 2020 will create an efficient infrastructure and decisions will be made using automated data feeds. If this sounds like an all hands on deck signal, indeed it is. Time for the industry to come together.
To the victor go the spoils: he who makes the next-to-last mistake.
(Recommended: Joan Magretta's book, "Understanding Michael Porter: The Essential Guide to Competition and Strategy")