• Demand for low sulphur marine fuels will rise in the coming months.
  • A shortfall in low sulphur fuel supply could lead to higher regional physical values for sugar, through higher freight costs.
  • Traders are building low sulphur fuel stocks to try to cover supply risk.

What’s Happening To Marine Fuels?  

  • On the 1st January 2020, the amount of sulphur allowed in marine fuels will fall from 3.5% to 0.5%.

  • This change was agreed by the International Marine Organisation (IMO) in an attempt to reduce greenhouse gas emission from the shipping industry.
  • Ship owners can comply in two ways:
  1. They can fit exhaust scrubbers and continue to use high-sulphur marine fuels.
  2. They can use low sulphur marine fuels.
  • Modifying vessels to fit scrubbers is expensive – typically $4m for a bulk cargo ship.
  • It’s easiest to fit scrubbers to new vessels, and payoff for the investment could be as long as 8 years, depending on the spread of high sulphur and low sulphur fuel prices in the future.
  • We therefore expect that most ship owners will comply by using low sulphur fuels.

Will There Be Enough Fuel To Go Around?  

  • We expect a sharp increase in demand for low sulphur marine fuels towards the end of 2019.
  • In order to increase supply, refiners around the world need to flex their output away from heavy fuel oils towards middle distillates, and/or change their crude slate towards lower sulphur blends.

  • We are already seeing signs of increased storage of low sulphur fuels to avoid the risk of localised stock-outs.
  • At Singapore (the world’s largest bunker port), lease rates for tanks have risen by almost 20% in 6 months and at least 14 oil tankers are being used as floating storage.
  • Sales of low sulphur marine fuels in Singapore also hit a record volume in June.

How Will The Rules Be Enforced?  

  • The IMO has no enforcement capability.
  • Once rules are decided it leaves the process of compliance and enforcement to member states.
  • This means there is the possibility of gaps emerging in how the rules are applied from 2020.
  • Already Indonesia has said the low-sulphur rules won’t apply to its domestic fleet operating in its territorial waters, because it’s too expensive to comply.
  • This could set a worrying precedent.

  • India has also grumbled that it has to comply with the new rules despite not feeling adequately included in the decision-making process.
  • Some member states (such as South Africa) are also unlikely to have relevant laws in place by the start of 2020.
  • Finally, there’s the risk that rules are not enforced rigorously, or that penalties for non-compliance are so low as to be meaningless.
  • We will continue to monitor all aspects of the transition to low sulphur marine fuels.

What’s The Impact On Sugar?  

  • In the event of regional supply disruption for low sulphur marine fuels, this could affect the competitiveness of sugar around the world.
  • For example, Thai raw sugar today is up to $37/mt cheaper into East Asian homes than Brazilian raw sugar.
  • But if East Asian freight rates climb around the New Year due to low bunker availability, this edge might disappear.

Stephen Geldart

Stephen joined CZ in 2008 and leads the Analysis Team, who provide leading-edge coverage of the sugar, ethanol, ingredients and packaging markets primarily on Czapp.com, CZ’s online portal. CZ’s analysis team also provide price risk management services for sugar producers, refiners and consumers, and regularly undertakes strategic consultancy work for energy majors, banks, and agricultural businesses. Before joining CZ, Stephen began his career in the oil refining industry. He holds an MSci in Chemistry from Imperial College London.

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