IMO 2020: A Reminder of the Continuing Opportunity for Agile Fuel Management Strategies

by Matt Muenster, Senior Manager of Applied Knowledge, Breakthrough
Friday February 7, 2020

Through the IMO 2020 sulfur cap transition, the influence of the regulatory environment has grown, and conventional fuels have become cleaner. All of this came with price implications for the movement of freight, and we have been frequently reminded that fuel is the most volatile cost in shippers' transportation spend.

The three most common bunker fuels have experienced intense volatility and wide price ranges beginning in the second half of 2019. The price of high-sulfur fuel oil (represented by IFO 380 3.5%S) skyrocketed through market tightness during the attacks on Saudi oil infrastructure in September. High-sulfur fuel has since experienced consistent downward price pressure due to shifting market demand toward low-sulfur fuel.

Prices of very-low-sulfur fuel oil (VLSFO 0.5%S) and low-sulfur marine gas oil (LSMGO 0.1%S) also rose dramatically during the period of heightened geopolitical risk in September. Unlike high-sulfur fuel oil prices, however, their price trajectory following the attack remained tightly correlated to crude oil until December, when the shift to low-sulfur fuel led to a logistical shuffle and ultimately a price surge for these low-sulfur products.

As the chart above details, IFO 380, VLSFO, and LSMGO each experienced a price range in excess of $150/mt with IFO 380 and VLSFO prices spreading across a range of $240/mt over the past six months. Moreover, comparing the January 2020 conventional fuel price (VLSFO) with the January 2019 conventional fuel price (IFO 380) shows a year-over-year fuel price increase of $210/mt. Collectively, these figures confirm the general sentiment that the IMO 2020 market transition would be volatile and profound.

Market volatility has continued as downward price pressure entered the market following the first week of January. The year-over-year fuel market price impact quickly shrunk due to the unfortunate spread of the coronavirus. The continuing impact of the virus on the 2020 transportation fuel market remains uncertain.

For now, VLSFO prices have fallen to a level last experienced in September. The abrupt reversal of prices to pre-fourth quarter levels has been a massive surprise, especially considering VLSFO had very limited market demand in September, at less than 5% market share.

Agile Fuel Management Strategies are Needed to Keep Pace with the Market

While anticipating the shocks included in the above description of the IMO 2020 sulfur regulation transition is unlikely—particularly because it was in part driven by geopolitical events and a virus outbreak—shippers can use the IMO 2020 experience as the basis for improving their supply chain strategies for a continually evolving energy market.

For example, consider where the market was one year ago, where it is now, and where it will potentially be in a couple years should projections hold.

Although projections of bunker fuel market share on Jan. 1, 2020, received the most attention during the transition, this mix is expected to shift back toward high-sulfur fuel in coming years due to scrubber uptake. High-sulfur fuel will not likely return to its leading market share position, but estimates suggest it may grow by at least 10% from market levels at the end of 2019. This is modeled in the chart that follows.

Based on current market economics, scrubber investments will pay off in as little as 1-2 years by most estimates. Presumably, shippers who leverage market data and insights for determining their mix of freight moved to market by vessels with scrubber installations will set themselves up for lower fuel bills.

How Should Shippers Navigate the Shifting Emissions Environment?

Moving forward, expect the pace of market changes to accelerate. The influence of the regulatory environment will grow, but so too will the influence of stakeholders' demand for cleaner supply chains. These pressures will result in an economically motivated pursuit of alternative energy and technologies to produce cleaner conventional fuels, ultimately growing the portfolio of commercially viable transportation energy.

Solutions that address the risks created by the IMO 2020 fuel market transition's tightening emissions policies have not been widely discussed in the marketplace. Many shippers feel they have limited means of navigating these changes, but the reality is that better strategies do exist.

To navigate the maritime industry throughout 2020 and beyond, shippers have several key steps that can be taken.

First, it's time for shippers to refocus efforts toward understanding their transportation energy requirements. The focus is inevitably on cost, but understanding current fuel consumption and emissions parameters will better inform a shipper of risk their freight may be subjected to. Shippers should assess their emissions exposure by mode of transportation and model the sensitivity of their network to changing emissions costs.

Second, shippers should determine instances where transportation mode and equipment conversion will develop the earliest return-on-investment. For example: to what degree would a carbon tax on diesel fuel merit the conversion of truckload movements to intermodal moves? Where, geographically, does this make sense first? These circumstances and areas of your shipping strategy provide low-hanging fruit for better optimization and cost savings.

Finally, shippers should implement strategies to lower the carbon intensity of the fuel consumed by their network. How might shifting part of a network toward carriers consuming liquified natural gas or biofuel reach emissions reduction objectives and reduce future risk exposure? What are the additional economic considerations for corporate sustainability objectives?

Shippers must continually work toward reducing the cost, consumption, and emissions of moving their goods to market. Emissions will continue to increase their impact upon transportation networks as their full societal cost factors into the movement of freight. Shippers who advance their sustainability strategies ahead of policy change will create a competitive advantage.