2020 Sulfur Cap Could Add $60 Billion to Shipping's Annual Bunker Costs

Wood Mackenzie says global bunker fuel costs could increase by as much as $60 billion per year from 2020.

A new study by Wood Mackenzie suggests that global bunker fuel costs could increase by as much as $60 billion per year upon the International Maritime Organization's (IMO's) implementation of a 0.50 percent global sulfur cap on bunkers, Dry Bulk reports.

Using a 100 percent compliance scenario, the consultancy suggests that higher crude prices, as well as tight MGO availability, could push the price of MGO up by nearly four times against fuel oil prices in 2016 - costing the industry an annual $60 billion in the process.

"Switching to MGO is a more costly solution. In full compliance, we expect shippers to try to pass the cost to consumers and freight rates from the Middle East to Singapore could increase by up to US$1 a barrel," said Sushant Gupta, research director for Asia refining at Wood Mackenzie.

The consultancy says it also anticipates a shift in bunkering locations upon implementation of the 2020 cap, suggesting that availability of compliant fuels may push shippers away from the Singapore market and into China, where MGO supply is expected to plentiful.

In order to respond to the shift in demand for MGO over fuel oil bunkering, Wood Mackenzie says Singapore will need to rework its storage arrangements and related infrastructure.

Looking to other compliance options, Gupta says a significant rise in demand for liquefied natural gas (LNG) bunkering is unlikely due to a lack infrastructure, and expects LNG bunkering to rise to 16 million metric tonnes (mt) per year by 2025 from 2016's 0.5 million mt.

"Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a high rate of return of between 20 percent and 50 percent depending on investment cost, MGO-fuel oil spread and ships' fuel consumption," said Gupta.

"Despite attractive returns, penetration rate for scrubbers could be limited by access to finance, scrubber manufacturing capacity, dry-dock space and technological uncertainties. The shipping industry is traditionally slow to move, but in this case, early adopters may hugely benefit."

Gupta also says uptake of scrubbers may be hindered by the introduction of other environmental regulations on shipping, as the systems can address sulfur emissions but not those of nitrogen oxides.

Earlier this month, Nick Confuorto, President and COO of CR Ocean Engineering (CROE), told Ship & Bunker that, from a cost perspective, the time is never going to be as good as it is right now to buy scrubbers.

The comments come in contrast to a recent survey by UBS Limited (UBS) indicating that, once the 0.50 percent global sulfur cap comes into play in 2020, around 19 percent of shipowners are planning to use scrubbers and carry on using HFO, rather than switching to use more expensive low sulfur fuels.