Twelve months ago, some analysts predicted that the impact of IMO 2020 could be as momentous as when ships’ switched fuel type from coal to fuel oil. They often went on to predict widespread availability issues, compatibility problems, and high prices. With the exception of a few weeks at the start of the year, none of them have proven to be as consequential as those analysts feared.
Covid-19 has impacted every industry in different ways, and it is no surprise that it has been one of the factors dominating a sector as diverse and global as bunkering. The pandemic has had a major impact on marine fuels throughout the year. In some sectors, such as cruise, there was very minimal demand for many months. In others, such as containers, demand has fluctuated massively.
Twelve months ago, there were concerns that some regions would not be able to supply enough distillate fuels to meet demand for both domestic and post-IMO 2020 maritime needs. However, the global reduction in fuel demand from land sectors produced by the pandemic has meant that more than enough compliant bunkers have been available for shipping.
On the supply side, it is easy to forget that disagreements within OPEC+ in February and March over how much crude oil to produce rapidly increased oil production. Although some agreements on limiting capacity have been made, there remain several key oil producers still ‘offline’ and this means that latent supply is likely to continue to exceed actual demand for some time to come.
Yet it is important to remember that we will see a return to oil demand equilibrium at some point. As other industries return to work, and when refineries have worked through the surplus crude oil in their systems, some of the risks highlighted twelve months ago may rear their head once more – although the severest predictions we saw in 2019 are unlikely to come to pass.
James Enston
A volatile year
There has been an unprecedented level of volatility across bunker prices this year. For example, VLSFO prices in Rotterdam fell from roughly $600 per ton in January to $150 per ton in May and have since risen to the low $300s. This has presented a textbook example of why it pays to consider hedging as part of a viable bunker procurement strategy.
Big price moves are nothing new in the marine fuels industry. Indeed, the market had already seen a series of more volatile years in the lead up to 2020. Shipowners, charterers, and bunker suppliers are left exposed by even modest price movements, let alone the dramatic shifts we have seen over the past 11 months.
Unexpected cost spikes can quickly eat into liquidity, let alone profitability. The only way to navigate these hazards is to implement a comprehensive and robust risk management strategy. This requires planning, an expert understanding of the risks involved, and sound financial backing.
As vaccine roll-outs commence, life will eventually return to ‘normal’ for other petrochemical-intensive industries and demand for distillates will rise. However, it is not realistic to expect bunker markets to maintain stability in the medium term.
A new dynamic
The complexity of marine fuels increases the more they are regulated. IMO 2020 has created new issues for shipowners to consider before any fuel purchase; where at one time a buyer might only have to worry about price, today they also have to consider compliance, compatibility, and availability.
This new dynamic means that the traditional, commoditised relationship between bunker suppliers and customers no longer delivers the kind of value that shipowners need. Modern bunker traders need to act as trusted partners, acting transparently and collaboratively with customers and stakeholders across the industry to implement bespoke ‘energy’ strategies that meet a shipowner’s needs, now and in the future.
As price volatility is expected to persist, at least for the medium term, risk management is becoming even more critical. This must be included in any ‘energy’ strategy, with hedging and other measures in place to safeguard a client’s liquidity from abrupt cost rises – and modern bunker traders need to be equipped with the financial strength, comprehensive insurance, and specialist knowledge to deliver this.
In this new environment, some players in the bunker industry will need to change to stay relevant and significantly adapt their business model. Local and technical expertise, global coverage, and financial and organisational strength are the base requirements to deliver in this new environment.
Earlier this year, we finalised the merger between KPI Bridge Oil and OceanConnect Marine to create KPI OceanConnect. There were a lot of clear synergies in our “people first” and consultative approach from the start, and it has already allowed us to create an organisation that not only meets these criteria but delivers advanced marine energy solutions on a global scale. Bringing together even more knowledge and expertise, new ideas and ways of thinking, and a renewed energy to a changing marketplace has been an exciting task that leaves us primed to offer even greater levels of service and confidence for our partners as the market rapidly changes.
There are challenges ahead for the industry, as bunkering transitions from a commoditised, purely transactional process to delivering comprehensive consulting services. This will become ever more important as we see greater complexity across technical, logistical and financial concerns. I am confident that the knowledge and approach we have mainstreamed in KPI OceanConnect makes us perfectly placed to help the industry manage this change, and continue to reliably deliver for our partners in the future.
Source: James Enston, Managing Director, KPI OceanConnect London