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New Rules on Cleaner Marine Fuel Started Jan. 1. There Are Already Winners

Tuesday, 07 January 2020 | 12:00

New rules on shipping fuel took effect on Jan. 1, and they are already causing swings in commodity prices and shipping rates that should benefit both shipping companies and refiners.

New rules on shipping fuel imposed by the United Nations go into effect on Jan. 1, and they are already causing swings in commodity prices and shipping rates that should benefit both shipping companies and refiners.

The rules, known as IMO 2020 after the International Maritime Organization that approved them, require all ships to use fuel containing less than 0.5% sulfur, down from a limit of 3.5% under prior rules. To comply, ships have to be equipped with scrubbers to remove sulfur from emissions or companies will have to buy fuel that contains less sulfur.

Shipping executives said in recent interviews that the rules are already causing shifts that should benefit companies that prepared for the change, and refiners that are equipped to process compliant fuel. While shipping companies will have to absorb many of the new costs associated with the rules, they also see several opportunities, and companies that prepared have thrived in recent weeks.

One executive who is optimistic about the change is John Wobensmith, CEO of Genco Shipping & Trading (GNK), the largest U.S. dry-bulk shipping company, specializing in transporting iron ore, coal, grain, steel products and other goods.

Wobensmith expects that about 20% to 25% of large ships around the world will have scrubbers installed by Jan. 1. The rest will have to buy more-expensive, low-sulfur fuel or have scrubbers installed, putting them out of service for weeks. Genco has installed scrubbers on all of its large vessels, which account for 17 of its 55 ships but consume about 45% of the fuel the company uses.

“All of our ships are going to be done before year-end,” he said earlier in December. “That’s before the regulations come into effect, which is very important.”

The scrubbers leave Genco in a good position to benefit from the new rules, because its ships will be able to transport commodities while other ship operators will be waiting at shipyards for the work to be done. Overall, he expects the supply-demand balance to be favorable in 2020, leading to strong rates.

Ships that transport crude and refined products are also seeing increased demand for their services, said Tony Gurnee, CEO of Ardmore Shipping (ASC), an owner and operator of product and chemical tankers. Ardmore’s ships mostly carry diesel and gasoline, and diesel demand in particular is growing rapidly. That is because shipping companies are adding lower-sulfur diesel fuel to the high-sulfur fuel they have normally used. “It’s mostly diesel,” he said. “You’re essentially diluting down the bad stuff with diesel.”

Growing demand is helping push average day rates for Ardmore’s ships to more than $20,000, from about $13,000 a year ago, he noted. Ardmore’s stock price has nearly doubled in 2019, and Gurnee is clearly excited about its momentum. In fact, he thinks the stock hasn’t fully priced in the strength of demand in the tanker business.

“We think the commercial market we’re in is ahead of the stock price,” he said.

Gurnee also noted that consumers and other industries may begin to see the fallout from the new regulations, because rising diesel prices “will have an impact on refining and maybe the price at the pump in places like Europe.”

Refiners with higher-tech facilities are likely to benefit from the new rules, because they can turn dirty shipping fuel into cleaner products and sell it at strong prices. Among the companies likely to benefit are Valero (VLO), Marathon Petroleum (MPC) and Phillips 66 (PSX).

Lois Zabrocky, CEO of International Seaways (INSW), an owner of both crude and product tankers, is also optimistic about the regulations, and has seen strong rates. “It’s a very very tight market right now” for low-sulfur fuel oil, causing prices and rates to rise, she said.

As prices have risen, oil traders have even been using large tanker ships to hold fuel off the coast of Singapore and other areas. In August, International Seaways was getting rates of about $25,000 a day for its largest ships, known as very large crude carriers (VLCC), but by December it was getting about $90,000 a day. Zabrocky noted that the company doesn’t make money at $25,000, so the new rates are a big deal. “This business is not for the faint of heart,” she said, laughing.
Source: Barron’s

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