2019: The Shipping Industry's Swan Song

Grace Quinn, Baringa Partners

With less than a year to go until the global sulphur cap is introduced whether you own or operate local passenger ferries, fishing trawlers, tug boats, bulk, crude, chemical or gas tankers (to name but a few) you will have probably made some significant investments towards compliance or at the very least considered which of the below options is the most viable for your business.

1. Switch to burning Marine Gasoil/Diesel (MGO/MDO) or a grade of Low Sulphur Fuel Oil (LSFO) –both options more expensive than High-Sulphur Fuel Oil (HSFO). Growing uncertainty around fuel quality, compatibility, security of supply and price differentials.
2. Invest in an Exhaust Gas Scrubbing System – up-front capital costs will have a varied payback period depending on the business in question. Concerns rising over increasing port and regional restrictions on the use of open-loop scrubbers.
3. Switch to Liquefied Natural Gas (LNG) as a bunker fuel – up-front costs to switch to LNG propulsion are considerable however LNGs emissions profile and scalability is unmatched. Uncertainty around scale of infrastructure is starting to be effectively addressed as investment worldwide has grown considerably since 2015.
4. Invest in dual fuel engines.
5. Do not comply and be subject to fines and potential operating constraints.

As the deadline looms many have already hung their hat on one or more options to ensure compliance in the short to medium term and committed to a strategy for new builds down the track. This has proven to provide some increased certainty to the market, particularly in relation to LNG, evidenced by the increase in supporting infrastructure being rolled out worldwide . LNG as a marine fuel is fast becoming a player to watch.

With open questions around fuel supply balances, compatibility and price differentials, ship owners are faced with the challenge of trying to mitigate their exposure while remaining compliant and competitive.

As a result there are many who are still undecided on their short to long term strategy in the face of such unknowns. These industry stakeholders are no doubt analysing all potential options against various price and supply scenarios before investing one way or the other. This is a risky position to be in, particularly as in the short-term it limits the compliance options available and fully exposes them to market price swings.

So what's the bottom line for the shipping industry?

Clearly stakeholders in the shipping industry need to define what this sulphur regulation ultimately means for their commercial operations both in 2020 and beyond, to understand how much value is at stake. Understanding the portfolio of supply available at each port to ensure availability aligns with your business model and demand will be crucial. Product supply requires more than refineries making the investment, ports and terminals also need to invest in the infrastructure to support the bunker network.

Undoubtedly fuel costs will increase and this cost is expected to be passed onto the customer, with freight rates increasing as a consequence. At this stage it is unlikely that industry stakeholders have an accurate view of the impact compliance will have, either directly or indirectly, on their bottom line. Not surprising given the degree of uncertainty still at play. As supply and demand balances even out, prices become more stable and new information becomes available the competitive landscape will become less ambiguous and support decision-making.

In the meantime ship-owners should remain flexible and informed to navigate this transition. For example keeping up to date of the escalating investments in the LNG bunker supply chain to provide some direction and reassurance.

However those who maintain their 'wait and see' approach too long should be mindful of the fact that they risk losing margin and bargaining power in the short term. Like most industry disruptions, regardless of where you sit in the value chain, making the right move at the right time will have big economic consequences.