Shipowners forge ahead with scrubbers despite narrowing high-low sulfur spread

Singapore — Shipping companies are pushing ahead with multi-million dollar investments to install emission-washing scrubber systems aboard their ships, despite concerns that a narrowing spread between high and low sulfur fuel prices could delay the return on those investments.

Shipowners across the world have placed orders for hundreds of scrubbers that allow them to continue using high sulfur fuels even after a new International Maritime Organization regulation limited the sulfur cap in shipping fuels to 0.5% from 2020.

Their bet paid of initially, as prices of high sulfur fuels sank versus the new 0.5% low sulfur fuel. At its widest, benchmark Singapore 380CST HSFO was at a discount of $327.47/mt to Singapore Marine Fuel 0.5% on December 26, S&P Global Platts data showed.

The spread has since crunched to a five-month low of $108.84/mt Tuesday, according to Platts data, thanks in part to tighter supply of high sulfur fuels and soft LSFO fundamentals.

Still, some shipowners insist scrubbers remain a viable investment.

"The price spread is frankly not too much of a concern for us; there was a time when it was $350/mt; now it's around $130/mt," a shipping company source in Singapore said. "I can tell you that the recent spread has not had any impact on our plans -- we're proceeding regardless."

Some shipowners said they would continue to invest in scrubbers as they form a vital part of their IMO 2020 compliance strategy as well as a means of hedging bunker fuel risks.

"Sure they are still viable...but looking at the [LSFO-HSFO] spreads today as opposed to those in January things have certainly worsened," Adrian Tolson, director at BLUE Insight, said late Monday.

"Retrofitting a scrubber on a 18,000 TEU containership at that point had payback of 1.5 years...at today's prices maybe this is 2.5 years. So for a big ship [large container, VLCC and Capesize] it all makes sense," Tolson said. "Anything below this size...maybe you think twice or decide not to do it."

The Singapore delivered Marine Fuel 0.5% spread over delivered high sulfur 380 CST bunker fuel, for example, has narrowed significantly, from an average of $298.90/mt in January to $192.88/mt in February and $137.29/mt in March to date.

"It's too early to say [if investments in scrubbers are worth it]," a shipowner in Asia said, adding that the coronavirus outbreak was adding to the issue by delaying installations at some Chinese shipyards.

HSFO supply

Refineries have curtailed HSFO production, and suppliers withdrew it from their bunker fuel offerings as they geared up to the IMO 2020 rule, raising some concerns over both securing fuel oil at reasonable prices as well as its availability at smaller ports.

In Asia, South Korea's GS Caltex is the only refiner still producing HSFO for supply. Japan's refineries have cut HSFO to 10% of their fuel oil production, sources said.

In the Middle East, Saudi Aramco intends to eliminate fuel oil production at its refineries by 2024 to focus on clean fuel production.

The widespread adoption of scrubbers is also fraught with other doubts including rules governing the use of scrubbers. Several countries around the world have banned ships with open-loop scrubbers from discharging scrubber wash water in their port waters.

"After spending so much on scrubber investment, we need to be assured that we can continue to use it," another shipowner in Asia said.

Silver lining

Some shipowners told Platts that while the HSFO-LSFO spread was a consideration, scrubber retrofit plans needed to be viewed over a longer term.

"Frankly, you are also seeing a change in behavior of shipping companies, now freights are down so much, so you actually lose a lot less money than you would have last year if you were trying to install a scrubber," a shipping company source in Singapore said.

Last year, what freight companies may have lost with their vessels sitting in the shipyard was about $20,000/day when the spending time was about 40 days at a shipyard to get a scrubber retrofit, he said. This figure is now around $2,000/day with the fall in freights, with a spending time of about 50 days, he said, adding that installation costs had also fallen.

A dry bulk shipowner in Asia said that while the VLSFO-HSFO spread had narrowed recently, the forward curve showed scrubbers were still a viable long-term solution for them.

As far as tankers were concerned, some scrubber-fitted ships are still commanding a premium over non-scrubber ones, making a positive case for installing the technology.

For modern VLCCs, the premium is currently around $7,000/day, according to estimates by brokers. A scrubber-fitted and non-scrubber VLCC is currently being offered around $44,500/day and $38,000/day, a broker in Tokyo said. The corresponding numbers for a one-year time charter are closer to $43,000/day and $36,000/day, the broker said.