IMO2020: The HSFO Conundrum

Paul Hardy, NSI

As we all know demand for HSFO will fall off a cliff Q3 onwards. This represents a number of challenges for the physical supplier.

Falling product prices

The market is steeply backwardated. Those long on product will most likely see the value of cargo drop daily. It is essential for those traditionally unhedged to put in place a hedging programme to roll with the market during this period. For those buying on a 3/5 day spread simply sell the swaps forward when buying the cargo and buy back the swaps when you sell the bunkers for the same period. This will allow you to follow the market and will avoid 'fire sales' if long on product and the market dropping fast. With a volatile forward market use the tried and tested KISS principle. Any exotic solution will mean margin being given away.

Drop in demand

As vessels switch in advance of IMO2020 to compliant fuels demand will reduce in a non linear fashion. For those under term contract with cargo suppliers it will be necessary now to renegotiate these contracts to give more flexibility on volume. It is imperative you are not left with an imbalance of supply and demand. This needs extra care if you have limited storage. Cargo suppliers will naturally have less flexibility if approached at the last minute as they will also like to avoid being long on HSFO. Please check the penalty clauses for underlift in all of your term contracts.

Contracts

Many suppliers are holding HSFO contracts for customers which go up to the end of December. This represents a logistical challenge as if barges and storage need to remain 'dirty' how effectively/when can you prepare for the switch to compliant fuels? It is essential to liaise with customers now and work out their switchover dates and if they will have any effect on contract volumes- it might be that the customer also wants to reduce volume in say November and December which will allow you to manage your logistics more effectively.

The key is not to be left long on HSFO product at the switchover date with demand at an estimated 10% of current. This is the biggest risk as I see it.

Barging

With uncertain demand on HSFO how do you factor in the bunker premium (barging cost). At present it is easy as a supplier knows roughly how much throughput is possible per month basis contract positions and historic demand calculations. Q3 onwards this will change and will naturally cause a rise in the cost of logistics with same fixed costs but lower turnover of product. If you have cargo based contracts with owners it could put you at a significant disadvantage. Your per MT logistic costs will go up but your contract premium is fixed. If contracts are bunkerwire based the additional cost of logistics should be factored into the daily reported prices. There will more than likely be a larger spread in prices though as each supplier has a different demand profile/per MT cost depending upon the balance of contract/spot.

Post IMO2020

There are many challenges linked to the above factors:

• Do you supply HSFO at all?
• How much demand will there be?
• How do I price the cost of logistics?
• How many barges do I use for HSFO?
• How much storage do I take for HSFO?
• How can I effectively communicate the changing market to my clients?

Transparency

The key as I see it is to effectively communicate the changing supply economics with your clients/suppliers. If they can understand the pressures you are under and how prices will be effected you can collaborate and plan in advance. As brokers we can of course manage this process as well as help with some of the risks related to the changing market conditions. We are also able to help communicate effectively your supply position through our www.2020planning.com platform.