FEATURE: Bunker Industry Awaits COVID Recovery in 2022 After 2021 Stall

The bunker industry is waiting for the rest of its COVID-19 recovery this year. File Image / Pixabay

The bunker industry is waiting for a recovery from COVID-19 in 2022 that seemed to stall last year.

From the point of view of public announcements from shipping and bunkering firms, last year was a year of decarbonisation, and with the challenge of IMO 2020 firmly behind it the industry shifted focus to emissions reduction efforts, alternative fuels and more efficient systems.

But behind the scenes in the conventional fuel market that still dominates bunker demand, the story was of a slow increase in sales with little signs of life in profit margins despite significant price rises.

Global bunker prices showed strong growth with crude last year. Image Credit: Ship & Bunker

The challenge for the bunker industry in 2022 will be to manage its growth during the market's recovery while not overextending itself as fuel-efficiency measures and the shift to alternative bunkers drive the continued secular decline in bunker demand. The hope will also be that the climb in crude prices does not lead to an overheated market in which restricted access to credit drives some out of business.

Industry Takes 46% Bunker Price Rise in its Stride

After all the worry that IMO 2020 would send bunker prices 20 to 40% higher, the onset of the coronavirus pandemic meant that marine fuel prices in 2020 actually fell 7% compared to the previous year.

The pandemic may not be over, but that previously predicted bunker price rise finally appeared in 2021, with the annual average VLSFO price in major ports jumping 46% compared to 2020.

While in previous years this may have been cause for concern, the industry took it in its stride with the sharp rise in fuel prices going almost unnoticed having been dwarfed by the much larger rise in freight rates. One Ship & Bunker source even quipped there must have been no easier time to be a credit manager. 

Box carriers faired particularly well last year, with all the biggest carriers announcing at some point during the year that an earnings record had been broken. Maersk, who recently lost its title as the world's biggest carrier, was a case in point, in Q4 2021 posting its most profitable quarter ever and now looks set to report a record net income of more than $17 billion for 2021.

Delayed Demand Recovery

One big question hanging over the market this year is when we may see a return to 2019's demand levels. 

The official IMO data imply global bunker demand from ships over 5,000 mt in gross tonnage was 216.4 million mt for 2020, down by 5.5% on the year, and the recovery of these sales has not yet been completed.

Singapore's MPA data for January-November 2021 show sales there climbed by just 0.6% last year from 2020's levels. Rotterdam's Q1-Q3 2021 sales were up by 5.4% on the year, and Panama's January-November volumes rose by 3.9%.

Meanwhile Ship & Bunker and BLUE Insight's quarterly global volumes survey showed Q1-Q3 sales at 17 leading bunkering areas 2.7% higher in 2021 than in the same period of 2020.

HSFO demand is rising. Image Credit: Ship & Bunker / Data Credit: MPA / Port of Rotterdam / AMP

All of that suggests global demand for 2021 could be as much as ten million tonnes short of the IMO's implied total of 229 million mt for 2019.

The container market is operating at a high capacity -- although relieving port congestion to get more vessels moving could improve this segment's bunker demand further -- and tankers and dry bulk saw some improvement in 2021. The cruise industry remains an area where significant increases in demand have been put off, with suppliers at cruise-focused ports hoping for a more robust recovery this year.

HSFO Gains Market Share

But not all sections of the bunker market have seen sluggish growth over the past 12 months. 

HSFO demand has been in rude health, with its share of the market increasing across the world, driven by deliveries of more newbuilds equipped with scrubbers. Scrubber-fitted tonnage accounted for almost a third of global boxship capacity by December 20, according to shipping intelligence service Alphaliner.

In Singapore HSFO sales were 25.6% of the total in January-November 2021, up from 21% in the same period a year earlier. In Rotterdam the share was 26.3% in the first three quarters of last year, up from 26.2% a year earlier. And Panama's January-November HSFO share was 18.5% last year, up from 11% in the same period of 2020.

These new scrubber installations have been aided by price incentives, with the spread between VLSFO and HSFO widening significantly last year. The global VLSFO premium to HSFO stood at $153/mt by the end of 2021, up from $79.50/mt at the start of the year, according to Ship & Bunker's G20 index of prices at 20 leading ports, an increase of 92%.

LNG Leads Alternative Bunker Options

2021 also saw a continued surge in alternative bunker demand and general interest in marine decarbonisation.

The main market to talk about here remains LNG, which is rapidly becoming a mainstream fuel choice in some shipping segments.

French container line CMA CGM now has several giant boxships running on natural gas, making it the largest consumer of this bunker type, and many other shipping firms are now ordering gas-powered tonnage as well. A total of 240 ships capable of running on LNG were ordered last year, according to classification society DNV, while in December Gibson Shipbrokers noted that about 23% of the current tanker order book will have LNG bunkering as an option.

The development of LNG bunkering infrastructure also continues apace, with DNV calculating the combined delivery capacity of all the LNG bunker barges ordered last year could cover as much as 3 million mt/year of demand.

LNG bunker sales at Rotterdam continued to soar last year, with the third-quarter sales of 213,250 m3 topping the 210,334 m3 noted for all of 2020.

But LNG's rise last year came despite a record surge in prices. LNG priced in fuel oil terms at Rotterdam ended the year at $1,396/mt, according to Ship & Bunker pricing sourced from gas supplier Titan LNG, a rise of 325% from the $328.50/mt seen at the end of 2020 and having hit a record high of $2,053/mt earlier in December.

VLSFO prices at Rotterdam gained 46% to $570.50/mt last year.

Political opposition to LNG bunkering continued to simmer last year, but LNG advocates continued to make the case that a potential later shift to bio- and synthetic LNG leaves a clear path to decarbonisation. The strength of this argument will be tested by how quickly production facilities for these alternative gases can be set up near global bunkering hubs, and at what cost.

Maersk Drives Methanol Bunkering Interest

The rise of interest in methanol as a bunker fuel was one of the stand-out stories from 2021, with Maersk's announcement that its first carbon-neutral ships would run on green methanol putting a rocket booster under this nascent industry.

Maersk's first methanol-fuelled ship will be a 2,100 TEU feeder vessel being delivered in mid-2023, and eight more 16,000 TEU boxships will be on the way from early 2024. Media reports this month have suggested this order could be extended to add a further four ships.

The new ships cost $175 million each, and that figure is roughly 10-15% higher than the cost of ordering equivalent conventionally-fuelled ships, according to the company's estimates. Maersk has previously said the green methanol it plans to buy will cost roughly double current conventional bunker prices for the first few years -- meaning around $1,000/mt -- but given the much lower energy density of methanol, this will amount to somewhere closer to $2,000/mt in VLSFO terms to achieve the same propulsion.

Securing supply of enough green methanol will be the first challenge for Maersk. As things stand the firm will need to find 280,000-360,000 mt/year of green methanol for the eight new ships, having already secured a contract to supply the smaller feeder vessel.

Maersk has said it is not certain it will be able to find the methanol needed for all eight of these ships' maiden voyages, but that it is more optimistic about securing the supply by 2025 or 2026.

More Growth Expected for Rival Alternative Bunkers

The other alternative fuel choices saw less stellar growth in interest than LNG and methanol last year, but are still expected to pick up pace in 2022.

Several shipping companies have tried out biofuel blends over the past year, with no notable technical problems reported with using them as a drop-in alternative to conventional bunkers.

The challenge with biofuels will come with the cost they can be delivered at, and the extent to which biofuel production from sustainably sourced biomass can be scaled up to meet the needs of the shipping industry.

Ammonia as a bunker fuel saw more muted interest in 2021, with Maersk's methanol announcement stealing some of its thunder and more comments being made on its technical challenges.

Mark Cameron of shipping firm Ardmore said he was still 'relatively uncomfortable' with ammonia in November, commenting on safety issues.

"We heard a lot of language around ammonia-ready vessels, and based on the conversations I've had so far, I'm not entirely sure there's as much substance behind that as you might be led to believe sometimes, at least in terms of what the shipyards are putting forward as an ammonia-ready construct," he said in a webinar.

Drawing on the example of last summer's sinking of the bulker Wakashio and subsequent fuel spill, Cameron raised the question of whether a spill along those lines of ammonia bunkers could have been more damaging, and what vessel designs could be created to avoid that problem.

"Let's be honest -- when ships have accidents today, fuel does spill," he said.

Regulatory Landscape

From a regulatory point of view, the decarbonisation agenda had a mixed year, with slow progress at the IMO but a new drive from the EU.

Several organisations were disappointed with November's MEPC meeting at the IMO, where hopes of an immediate move towards a net-zero 2050 target were dashed despite several countries showing support for this goal at the COP 26 event the previous week.

But the IMO's perceived sluggishness has led to an increased sense of urgency in the European Union to deliver their own package of maritime decarbonisation measures. In July the European Commission announced a proposal under which the emissions from all voyages between EU ports and 50% of those from voyages between the EU and elsewhere would be covered by its emissions trading system, meaning shipping firms would have to pay for their emissions.

The Commission has also set out its proposed FuelEU Maritime legislation, under which the carbon intensity of fuels allowed would be steadily reduced from 2025 onwards.

Commodity Trading Giants Muscle In

Moving back to the conventional bunker industry, one of the bigger developments in 2021 -- and one likely to continue this year -- was the large international commodity trading firms seeking to take a more active role in the bunker market.

Following on from Trafigura's launch of TFG Marine in 2020 and Mercuria's earlier expansion of Minerva Bunkering's role, more companies joined the trend in 2021.

Vitol announced the launch of its global marine fuels brand Vitol Bunkers in March. The firm is seeking to build on its position in Singapore after buying Sinanju Tankers Holdings in 2020 and in Fujairah with its 80,000 b/d refinery there that is a key regional VLSFO producer, while keeping its 50% holding in Cockett Marine Oil separate.

Hartree announced a similar move in June, with its new bunkering brand Hartree Marine Fuels looking to play a greater role in the global market.

But the large commodity traders were not the only ones looking for expansion last year; February saw the launch of new bunker supplier Delta Energy, which has expanded significantly since then.

Dan-Bunkering Case Raises Compliance Questions

2021 ended on a sour note for some with the Dan-Bunkering sanctions case in Denmark.

Dan-Bunkering, parent company Bunker Holding and CEO Keld Demant were prosecuted in their home country after being accused of EU sanctions breaches over 33 jet fuel deals with Russian counterparties in 2015-2017 where the oil allegedly ended up in Syria.

Demant was sentenced to a four-month suspended prison sentence, Dan-Bunkering was fined DKK 30 million ($4.6 million), as well as having profits of DKK 15 million confiscated, and Bunker Holding was fined DKK 4 million in the verdict announced on December 14.

The defendants decided not to appeal against the verdict, and Demant remains as Bunker Holding CEO with full support from its board and the company's owning family.

In a statement released following the verdict, Bunker Holding stressed that the judgement found Dement and BH had acted with unintentional negligence and there was no direct intent to intentionally breach EU sanctions.

And after detailing the comprehensive compliance systems it has in place, BH also hinted that the verdict may have an industry-wide impact on how compliance and counter party risk is now conducted.

"The judgement shows that it is no longer sufficient to screen trades against direct counterparties. Rather it points out the need to check your customers counterparts, even including several links downstream, in order to control the usage of the product being sold," it said.