Cem Saral, CEO of bunker reseller Cockett Marine Oil, talked with Claudia Carpenter about how shipping has adapted to the International Maritime Organization (IMO) 0.5% limit on sulfur in marine fuel effective January 2020, and what comes next.
Cockett Marine Oil, owned by Swiss trader Vitol and South African holding company Grindrod, resold an estimated 5.5 million tons of marine fuel in 2019, versus 6.5 million tons in 2018. Saral was named Cockett CEO in September 2016, after working for Vitol and Chemoil. Cockett handles roughly 18,000 deliveries to customers annually in every single line of shipping. The company has about 185 employees, with about 60 of them in Dubai, the operating headquarters.
Very low sulfur fuel oil (VLSFO), with no more than 0.5% sulfur, became the go-to fuel for shipowners at the start of this year, after the IMO required ships to stop using high sulfur fuel oil (HSFO), which typically has 3.5% sulfur. Marine gas oil (MGO) also became an option as IMO-compliant fuel, especially when the spread between MGO and VLSFO narrows. All MGO is either max 0.5% or max 0.1% sulfur, and is more expensive because it's a better quality product.
Cem Saral, CEO, Cockett Marine Oil
How has the IMO 2020 rule transition been for the industry and Cockett Marine Oil?
For the industry, I think we are a good representation of [the transition] as a global reseller. I think what we were expecting was probably more of a worst case scenario than what was actually realized. There was a lot of scaremongering to do with availability, product quality, enforcement, etc.
We've had quality issues, although they were far more minor than what we expected. We had a number of near sulfur limits, some minor flash-point related issues and some sediment related stuff. By no means should we minimize concerns about VLSFO quality issues, nor do I see that they are as elevated as they were perceived to be a couple months ago.
What has become the chief marine fuel after IMO 2020?
Our assessment shows that global marine fuel demand was near 300 million tons/year before the IMO 2020 transition, with nearly 20% of this gasoil for consumption in auxiliary engines, generators for larger ships and for main propulsion needs for a large number of smaller sized vessels.
Considering LNG, emission control areas-compliant fuel consumption, vessels fitted with scrubbers and other considerations including average vessel speeds and the shape of global trade activity, we estimate that around 185 to 210 million tons/year of HSFO [high sulfur fuel oil] marine fuel demand would need to switch to new compliant fuel, VLSFO with a max 0.5% sulfur content.
During early months of the transition, we estimate a run rate of about 70-75% or 140 to 160 million tons/year equivalent of this demand would be met with VLSFO while the rest of marine fuel demand would be met with marine gasoil. While we see VLSFO becoming a chief fuel of choice after January 2020 for the main engine propulsion for medium and large size fleets, going forward we also see a significant increase in marine gasoil's share in the marine fuel demand.
Looking at recent developments surrounding COVID-19, and the drastic drop in oil and product prices that points to strong headwinds to refinery run rates as well as demand, we also anticipate increased interest in marine gasoil and compliant products with a large portion of distillates such as vacuum gasoil in their blends.
Do you use Fujairah port for supplies?
Fujairah is probably one of our top 5 or 6 ports.
Has Fujairah had any issues related to IMO 2020 that are different to other ports?
Not really. The market was really concerned last summer about availability of VLSFO. Now with the two existing facilities there, through Uniper and VTTI, I don't think the market has suffered from a lack of availability. In the early days of the transition, December and January, the difficulties we faced were mostly logistics rather than availability. Most of the concerns or difficulties we had were not to do with availability but with logistic constraints of waterborne assets, which is, for now, by and large all settled in. The world has moved into a VLSFO reality today.
People were not demanding the new fuel early on because the difference in fuel costs [between HSFO and VLSFO] is so high – you wouldn't be looking to pay for something that is 30% to 40% more expensive a day sooner than you had to. The economics dictated that the transition had to be abrupt. And that brought about some logistical constraints, mainly on barge availability. But that's becoming a thing of the past.
Has liquidity been a challenge in IMO 2020?
I think liquidity has always been an issue. What we're seeing, and it's not exclusive to marine fuel, we've seen international banks, especially the European banks, strategically shying away from the shipping business over the last couple of years. And we also have seen a number of incidents that have put a lot of constraints on the marine insurance business.
Has Cockett had to change the way it does business because of IMO 2020?
Yes and no. Basically we do not exist in the physical supply chain. We sit on top of the value chain. We have a huge number of global vendors that provide us the fuel and we have a global set of customers who need the fuel. So from our perspective, what we needed to do is understand the changing landscape, to understand the new demand profile, and understand the capacity of our vendors to adapt to IMO 2020.
We had to educate and train our staff, we have implemented a lot of technical engagements with our customers to educate them on quality issues. I would say we were as ready as we could be with regard to our understanding of the landscape. We didn't need to transform how we do business from what we were doing a year ago.
Obviously it brought some different aspects to it. It takes a bit longer to conclude a trade today because the information needed to transact a VLSFO trade is far more detailed than previously with HSFO. People want to know more about the exact quality, the compatibility. So for the transaction, from origination to conclusion of a trade, we see a bit more communication or interaction with the end user and the vendor taking place. But other than that, nothing monumental I would say.
What is the outlook for the bunker industry?
The concern now is what is the marine fuel business going to do to adapt to a decarbonized world.
So IMO 2020 isn't the end of shipping's effort to reduce emissions?
Absolutely not. It's just the beginning of the new challenges. I think decarbonization is a challenge that will require a far bigger collaboration, a far longer and far more dramatic engagement that needs to be implemented globally. This is already happening today on shipping and ship liners and that will unquestionably impact the marine fuel pool, because the pressure to decarbonize is far more intense, the challenges we need to adapt to, the goals, are far higher than the mountain we climbed for VLSFO.
Do you expect mergers in the marine fuels industry?
Yes absolutely. The industry is fragmented and the industry needs consolidation. This isn't new, it’s been there for a long time. The underlying headwinds that are coming [from the move] to decarbonize [the shipping sector] will define those consolidation efforts rather than VLSFO. We will see more players entering the market, providing different types of fuels that are not in the playground of the existing fuel provided, such as ammonia, hydrogen, methanol, biodiesel and biofuel electricity. These are not in the main, but I think the next three years will be a wake-up call for many.
It's impossible to meet decarbonization challenges by staying with the existing marine fuel products we have. You can't simply decarbonize the world by selling VLSFO. You would need to be looking into different mixes of products and services entering the supply pool.
Will Cockett be a buyer or seller?
We will always be facilitators. I think our strength will come as we understand the changing demand profile, it will be much easier for a company like us to go and get the provider of the changing demand, the new product, and translate it into something our customers would need. So facilitation will become far more important if you are looking into a fragmented pool of maybe a dozen different options that end users have to choose from. Clearly, going forward, the marine fuel pool will be much larger with regard to the product count than it is today.
Do you have any plans to apply for bunker licenses in Singapore or Fujairah?
No. We are a reseller and we will remain a reseller. The essence of how a reseller model works is significantly different to how a physical supply chain participant's dynamics work. We don't try to mix the two. We believe it's a dangerous mix. Our primary concern is understanding the cash we put at risk and understanding and comparing the risk-adjusted return of the cash. If you run a physical business, your metrics change drastically. And combining the two is not an ideal mix.
Does Cockett plan to go into other markets than reselling bunker fuel?
Yes we do, we already are. We deal with a number of petroleum products. We have a small aviation business and we have a global marine lubricants business. We provide services to more than 120 airports. That started two and a half years ago, and it is growing. But I think at this point in time, the period from 2016 to 2019, the main concern was IMO, so we put most of our efforts into the transition of IMO. Once we are past that, I think we can look at more strategically our diversified businesses.
The marine lubricants business has been consistently growing simply because an engine needs fuel and an engine needs lubricants. And the VLSFO changes also transformed the marine lubricants business and the demand profile changed drastically. So we created a partnership model where we are providing technical advisory to our customers, not only about getting the right fuel, but getting the right lubricant so their engines run properly.
Is that business growing faster than bunkers?
Our marine fuel business is not growing volumetrically. If you look at the major resellers, their tonnages have not been growing for the past two or three years. We are trying to be more efficient and we try to be more profitable by trading more efficiently rather than let's say prioritizing having a larger market share. We never had that intention and we will never have that intention. We have no desire to look into having a higher market share as a primary goal. What we would like to do is how efficient and how proactive we can be in the use of our cash and resources to be able to deliver a reasonable return to our shareholders and a good service to our clients.