IMO 2020: Barging, Not Bunker Pricing or Product Avails, Will Make or Break the Case for Scrubbers

Paul Hardy, NSI

We are not seeing a mad rush to fit and retrofit scrubbers ahead of 2020 (with the notable exception of some large cruise lines). Is it due to lack of understanding of the technology? Lack of funding? Or a more simple lets wait and see what happens attitude?

What is sure is by all forecasts the gap between distillates and HSFO will widen considerably come 1st January 2020. Those early adopters of scrubbers may well get the bargain of the century for 1-2 years as the market is flooded with HSFO and not much to do with it. Distillate demand will spike in contrast and prices rise.

The wild card is going to be the availability of barging in certain markets. The fuel might be sourcable but keeping barges as designated HSFO with only limited demand for supply maybe more tricky. This is why many players with scrubbers fitted or scrubbers planned are dipping their toes in the water with term contracts. The primary aim is to secure the barging long term. The calculation? The HSFO price will handle itself.

The difficult calculation for an owner to make is when scrubbers have been fitted what % of my liftings can be done with available HSFO and what will have to be done with distillate? This greatly effects the economics. Liner companies have an easier task as they have fixed patterns of lifting and can plan forward potentially uncovering new supply centres. Those without a fixed line are working to 'guestimates' at present and closer to the date hopefully more concrete info. This is maybe the cause of some of the reticence in fitting scrubbers.

I anticipate those heavy lifters in the main markets will also consider chartering their own barge and putting their own cargo on board. This will be seen as a back up plan but also as a potential profit centre managing the logistics for other owners with limited access to barging. The downside to this strategy will of course be having to give credit to 3rd party owners. For an inexperienced player this can be a nightmare and an expensive one at that. We have seen over the years owners dip their toes in the bunker market and this could well be a perceived 'too good an opportunity to miss'.

Looking further down the timeline. If there is then a rush to fit scrubbers as the gap widens between HSFO and distillates, will we then see a contraction of that gap 2023-5 as HSFO demand strengthens? As one buyer told me tongue in cheek……..how long can you store fuel oil?

In terms of the economics of fitting scrubbers the calculation is simple basis the age of the ship and the type of conversion it needs. It could be a relatively cheap fix or an expensive one taking the ship out of service for a few weeks. That said I am very surprised more financing companies have not seen the opportunity of financing a fixed asset that should pay for itself over a fixed calculable period whilst giving the shipping company a competitive advantage in fuel cost savings. Normally if the financing is there the companies will do it.