S&B ANALYSIS: The Widening HSFO / VLSFO Spread and Potential for a Second Wave of Scrubber Uptake

by Martyn Lasek, Managing Director, Ship & Bunker
Tuesday January 26, 2021

Manufacturers of marine scrubber technology believe a second wave of scrubber uptake is on the horizon thanks to a rapidly widening spread between HSFO and VLSFO bunkers, along with a return to more normalized supply and demand dynamics.

There are plenty of signs to indicate they might be right.

After being largely shunned during the early part of the IMO 2020 run in, much to the bemusement of many an analyst who considered the HSFO + scrubber proposition a "slam dunk" in economic terms, the well-documented first major wave of scrubber uptake began in mid-2018.

As most readers will know the collapse of oil prices in 2020 and the coronavirus pandemic's impact on the global economy has meant that for much of 2020 the expected savings afforded by scrubbers were not fully realized.

This is not to say scrubber-equipped vessels did not enjoy savings as they certainly paid less for fuel last year, as indicated by data from Ship & Bunker's Global 20 Ports Average that tracks the average price of bunkers in 20 key bunkering hubs responsible for a significant proportion of global volume.

Owners and analysts had widely expected the spread to be around $200/mt. In 2020 Q1 the VLSFO / HSFO spread averaged $188.40/mt and $91.62/mt for 2020 as a whole. Owners also reported other financial benefits such as their scrubber equipped vessels commanding higher charter rates.

A Year of Extremes

The year certainly started off well with the spread between HSFO and VLSFO, in early January hitting a high of $315/mt.

This represented a premium for VLSFO vs HSFO of over 80%.

As COVID-19 measures took their toll on the global economy, by March 2020 that spread had fallen under $100/mt. In Q2 2020 it averaged just $62/mt, and $56/mt in Q3. In percentage terms, VLSFO in H2 2020 averaged a premium of 20% over HSFO.

Oil and bunker prices have risen sharply since the start of November with the cost of VLSFO gaining some 43%. As at Tuesday last week the spread between VLSFO and HSFO had widened to just under $100, with VLSFO rising to $455/mt - 28% higher than HSFO at $355.5/mt. Pricing has stayed in this range since.

Brent made a similar gain of 43% over the same period, to $55.50/bbl on Friday.

With bullish predictions from the likes of Goldman and UBS - who respectively see Brent rising to $65/bbl and $60/bbl by mid-year - there is plenty to suggest that prices and the scrubber spread are heading even higher this year. 

"We have been tracking the price differential and believe it is coming back with much strength," Nick Confuorto, President & COO at scrubber manufacturer CR Ocean Engineering, told Ship & Bunker.

"Unfortunately the shipowners are still not totally convinced that the differential will go to the previous levels or above.  That will change where they experience first hand the increases.  Scrubbers are saving money for the shipowners who had the vision to install them in the first wave. Most will wait for the second wave that is about to begin."

Anders Skibdal, CEO at scrubber manufacturer PureteQ, is similarly positive on the outlook for scrubbers.

"The increase in price difference and recent predictions of up to USD $200 price span before the year end has not gone unnoticed by shipowners nor by manufactures," he told Ship & Bunker.

"Most shipowners are realizing that once the balance in supply and demand for the various fuel products are restored the span in prices is going to increase."

Owners and Analysts

Skibdal and Confuorto's outlook is supported not only by analysts, but most importantly by the shipowners themselves.

Speaking to American Shipper recently, S&P Global Platts' head of oil pricing, refining and trade flow analytics, Richard Joswick, indicated a $100 VLSFO/HSFO spread was a key tipping point for decision makers.

"My guess is that it's probably not enough yet to put an older ship into dry dock and install a scrubber. But it might be enough if you're building a new ship," he said.

In terms of dollar savings today, recent analysis by Freight Waves' Greg Miller citing data from Platts Cape T4 Index, indicated scrubber equipped Capesizes last week were saving in excess of $2,500 per day.

Gibsons, meanwhile, recently reported a HSFO/VLSFO spread of $80 - $100/mt put savings for scrubber-equipped VLCCs above $5,000/day.

For context, scrubbers for these vessels would cost in the range of $3-$5 million, suggesting ROIs of around two to six years at the current rate of fuel cost savings.

As for newbuilds, orders naturally take some time before they hit the water, so ordering scrubber-equipped tonnage now is less about where the market is today and more of a comment on where owners feel the spread will be in the years ahead.

Once again, there are plenty of positive signs here too with leading carriers ONE and MSC in December ordering a combined 10 mega boxships with 24,000 TEU capacity, all with scrubbers. ONE's order is perhaps the most notable as prior to this it was the only top 10 carrier to not already have scrubber equipped ships.

VLCC, Capesize, and Megamax boxships are among the global fleet's biggest and thirstiest ships, making their case for using scrubbers the most compelling.

Perhaps no surprise then that Gibsons recently indicated that by the end of the year some 40% of VLCCs will have scrubbers.

But as fuel prices rise and the HSFO/VLSFO premium widens, so does the scrubber proposition overall.

"At the moment it is mostly the very big ships that are still buying scrubbers, but later this year I believe that we will see an increase in the number of scrubber orders," says Skibdal.

"Some of our customers are considering to order more scrubbers for planned new buildings and we think that it could result in firm orders in second or third quarter this year for installation in '22 or '23."

Thoughts on the Future Spread

As highlighted last week in my article Understanding the VLSFO / Brent Relationship and Bunker Price Outlook for 2021, the start of 2020 saw very unique market pressures due to vessels and bunkering assists switching away from HSFO and over to VLSFO. As such the factors leading to the $300+ spreads will not be repeated.

As 2020 saw a transition from one unusual set of market dynamics due to IMO 2020, to another thanks to COVID, we have yet to experience what things look like in a "normal" world with the IMO 2020 rule in place.

"If crude rebounds into the $60's then I think a $200 HSFO/VLSFO spread is possible but it is pushing it. If it widens beyond $200, this will encourage more VLSFO production or HSFO usage, both of which will then narrow this spread," Adrian Tolson, director of BLUE Insight told Ship & Bunker.

"Also, if HSFO gets very cheap then other ways will be found to take advantage of it outside of marine - it is just too valuable of a hydrocarbon to be sold at a massive discount to other hydrocarbons. It seems that we have also destroyed some HSFO refining capacity and found some alternate uses, all of which suggests that things may improve but there will not be a return to 'normal' for HSFO."


It's not just an attractive HSFO/LSFO spread that could drive the second wave of scrubber uptake. Fuel quality, or lack thereof, could also be a factor.

IMO 2020 has been an unquestionable success, but that is not to say the new VLSFO fuels have been entirely problem free. Wax formation and the corresponding clogging of filters has been one of the more notable and serious issues.

"We have been tracking all the problems ships have been experiencing with the low sulphur heavy fuels and believe that the glitter that was initially associated with that type of fuel has dulled considerably as ships report problems," says Confuorto.

"In the long term we remain of the strong belief that the most economical safe option for ships is to use scrubbers with HSFO."

It should be noted that the impact of the coronavirus pandemic has resulted in oil products as unusual as jet making their way into the marine fuel pool. As the impact of the pandemic subsides the composition of VLSFO fuels may also change.

"The cuts that are ending up in marine fuels will eventually be diverted to their usual applications. Stand by for the second round of fuel problems with very different causes," Don Gregory, Director of the Exhaust Gas Cleaning Systems Association (EGCSA), told Ship & Bunker.

"Converting residual fuel into propulsion energy remains the most environmentally and economically sound policy for ship-owners."

Future Fuels, Politics, and Environmental Considerations

Even if scrubber savings return to their pre-pandemic strength there are still several ways a second wave of uptake could be derailed.

Decarbonization and preparing for the IMO 2030 and IMO 2050 targets is currently getting a lot of attention. The industry is being urged to act and the inescapable fact is that scrubbers are intrinsically linked to fossil fuel use.

MSC and ONE clearly think scrubbers are a worthwhile investment at this point in time, and their recently ordered ships will most certainly be operating when the 2030 target is passed and perhaps even the 2050 goal too. And let's not forget that their decision was made at a time when potential future fuel candidate LNG is now a realistic option for shipowners - as Hapag-Lloyd showed with their recent order for dual-fuel gas-powered megamax boxships.

Still, it is possible that investing in scrubbers becomes undesirable from a political standpoint and owners instead feel compelled to spend dollars on something more in keeping with the decarbonization theme. This is far from a certainty, however.

As for the impact of true low-to-zero carbon fuels of the future, such as hydrogen and ammonia, Skibdal is among the many who feel adoption of such fuels is too far in the future to factor into the scrubber debate at this stage.

"There are more uncertainties in the new building market than ever due to widespread political statements of a zero carbon future for shipping. There are however no technical solutions that could provide for zero carbon in some years to come - if ever - and there is no available fuel that will reduce carbon footprint to even near zero using the well to wake principle," he says.

"A new ship has a life expectancy of 25 years or more, so it must be very difficult for shipowners to predict and choose how to design their ships."

It is also possible that scrubbers could become viewed as a positive in terms of decarbonization. A study last year by CE Delft found that burning HSFO in terms of lifecycle GHG emissions is lower than burning VLSFO due to the increased energy required to refine and produce VLSFO fuel and its constituent components.

"The CO2 savings could be in the range of 15-20% based on independent studies. That is significant," says Confuorto.

"The higher the pressure on CO2 reduction the better for the scrubbers. Any other carbon free technology is much longer in the future."

One of the biggest arguments against scrubbers in the run up to IMO 2020 was focused on their environmental credentials. Specifically, that the wastewater from open-loop scrubbers pollutes the marine environment. Scrubber advocates say this is categorically not the case, and both sides of the debate believe they have the science to back up their respective positions.

The good news for scrubber advocates is that the environmental pushback seemed to vanish in lockstep with the shrinking HSFO/VLSFO spread and it no longer seems to be a talking point - no doubt to the satisfaction of those who suggested the argument was always motivated by commercial pressures rather than scientific concern.

Nevertheless, this is something that is still on the table to discuss at IMO so, theoretically, scrubbers could once again be looked upon as environmentally questionable. Owners will no doubt also be spooked if this leads to renewed talk of a usage ban, as unlikely as such a ban being realised may be.

One final thought readers should keep in mind for scrubbers is to remember that the rules governing future ship emissions have not yet been set and they will have to tighten in the years ahead. While the focus is currently on decarbonization, emissions of NOx and PM are likely to be regulated in the nearer term.

While we still have oil burning ships on the water, then, we may well reach a point where it becomes untenable to operate such tonnage without a scrubber.