IMO2020: The Unexpected Consequences of Legislation

Paul Hardy, NSI

I have asked the question many times - what if the IMO had gone for a strict 0.10% limit to Sulphur in fuel with no equivalent methods of compliance, instead of a multi-tiered approach.

If the bold move had been made there would have been a number of benefits:

• Everyone would buy the same product (s)
• Suppliers would plan to supply the same product (s)
• Owners would have one option to plan for

Looking firstly on the product side MGO is by and large a homogenous product and we see in the market much fewer quality claims than HSFO. The reason is simple- you cannot hide 'additional items' as easily as you can in a dirty product. So straight off the bat you have an operational benefit.

On the supply side those with limited logistics can plan to store and sell one product. The multiple product market for IMO2020 has caused many suppliers a real headache due to unquantifiable demand. Data from our www.2020planning.com platform shows over 40% of suppliers still do not have a firm plan for supply come 1st January 2020. This is due to the interplay between uncertain demand,supply and product availability.

On the sales side the new 0.50% products have also been a hindrance as there is no existing market. This has caused opacity in price and an inability to price out product via effective hedging. Of course this will change later in the year but the leading price reporting companies are currently showing a $100 difference in 0.50% cargo prices between them. This also has a knock on effect in uncertainty for shippers. The liner sector especially has been hit as historically they price the fuel out in advance to manage costs and allow proper pricing of boxes. If the market was switching to 0.10% only then there is an existing and established market for MGO and a functioning hedging market. Many have used MGO as a proxy hedge in the absence of a functioning 0.50% market.

By having only one option owners would be faced by a simple decision i.e. we need to switch as do everyone else. The cost of fuel would go up but at a lineal rate for everyone. The owner would not be faced with the scrubber dilemma or the compatibility minefield of 0.50% Sulphur max fuel oil. We see many owners over the last months agonizing about their plans and time will tell which ones have made the economic, logistical, operational and environmentally sound choice.

So on the face of it a 0.10% Sulphur max limits would have been much simpler to implement. So why was it not done? Of course there are various interest groups lobbying for different changes but I think on balance it comes down to the refining industry. There is limited distillate production capabilities. A switch to 0.10% would cause arguably a large spike in demand of low Sulphur crudes. Shipping would vy with other end users for the available distillate. The result- most probably a massive price spike in both crude and distillate prices. Secondly, we are already seeing many refiners faced with the problem of what to do with excess HSFO. A move to 0.10% would see further issues.

The difficulty for legislators is they are not in the day to day market. For those not in the know bunkering can look similar to a petrol station where vessels turn up and fill a homogenous product at a standard price. As such, there are unintended consequences of legislation. At present these are uncertainty for all sectors of the market. One large part of me thinks it would have been better for everyone if the legislation went further to start with. Of course, the price spike and its knock on effect on the cost of consumer goods would be unwelcome but there would be a level playing field. Most importantly, shippers and suppliers could plan with confidence and for a common goal. What's more it would arguably better serve the environment.