Low cost of crude and cheap bunkers fuelling indecision amongst ship owners, stifling investment for refiners and physical fuel suppliers, and driving trader consolidation

The low price of crude is creating complacency amongst ship owners in relation to decisions over fuel procurement strategies, and future sulphur regulations, said Adrian Tolson, Senior Partner at 20|20 Marine Energy, a leading maritime consultancy. Speaking at the UK Chamber of Shipping’s Fueling Operations conference in London, Mr. Tolson also stated that the cheap price of bunkers is stifling investment from refiners and physical fuel suppliers, as well as threatening the existence of traditional bunker traders.

“Low oil prices and cheap bunkers have created a state of real flux within the shipping industry,” said Tolson.

“Ship owners have taken their eyes off the ball in relation to future global sulphur regulations. While this is understandable to a certain extent, margins have significantly decreased for fuel suppliers and traders, which is stifling investment in infrastructure, and the indecision over future compliance strategies means that refiners won’t invest in producing more middle distillates to meet the inevitable shortfall in 2020, the likely date for the 0.5% global Emission Control Area.”

Mr Tolson argued that the lower capital requirements needed to purchase bunkers has also created a further incentive for ship owners to go directly to physical suppliers, cutting out the bunker trader, whose existence has already been challenged by credit risk concerns.

Tolson stated:

“In the past market of high fuel prices, traders were a real necessity in providing credit to owners and operators; they were effectively bank rolling some types of shipping. With low crude prices, a key reason for being has been eroded and we should anticipate consolidation within this sector. For physical suppliers, the lower margins and reduced returns are stretching their ability to invest in infrastructure, driving down their ability to deliver the value within the fuel supply chain, which is their unique selling point. Those with liquidity and cash reserves have a real opportunity to create significant competitive advantage, if they can use their resources to invest wisely in developing their physical operations and assets, as well as developing their sales and marketing capabilities to meet the current and future demands of a market in transition.”

Mr Tolson believes that a critical factor in determining the future dynamic of the shipping industry is the price of crude in 2020, and the impact that this will have on distillate prices.

“If the global ECA is implemented in 2020, and if crude, as widely predicted in the industry, increases to $60 per barrel by this date, the key is the effect that this has on the price of distillates, which will be the most widely used compliance solution. Higher priced distillates will see the issue of bunker procurement, the erosion of profits, and concerns over compliance back on ship owners’ boardroom agendas. This could also lead to a significant uptake of scrubbers, as refiners look to sell very cheap heavy fuel oil, a by-product, which can only really be used within the shipping industry.”

Tolson concluded:

“The future outlook for marine energy is far from clear, however, it is critical that all stakeholders within the supply chain, from owners and operators, to fuel suppliers and traders consider the impact on their business models and respond. The time to act is now.”
Source: 20|20 Marine Energy