The lion's share of the bunkers market will remain spot-driven not only due to lower prices but as a result of stretched margins in the shipping industry, Peter Sand, Chief Shipping Analyst at international shipping association BIMCO, said in an interview with S&P Global Platts.
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"The pace of the decline in bunker fuel prices has been a shock and it may represent the only silver lining to the global shipping industry right now because demand [in some shipping sectors] is evaporating fast," Sand said.
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"With the expected drop in demand across all shipping sectors, everyone is looking at costs, and for voyage-related costs, bunker costs are number one."
Marine fuel prices have dropped sharply since the start of the year, in line with the broader oil complex. The price of 0.5% sulfur marine fuel on a delivered basis at Rotterdam was assessed at $230/mt on May 28, down 60% from the start of the year, S&P Global Platts data showed.
But cheaper prices for marine fuels mirrors that of reduced demand in the shipping sector, acting as a double-edged sword for the maritime industry and leaving analysts to expect demand for bunker fuel to contract by approximately 5% this year.
"I am pretty sure the whole shipping industry would love to pay more for the bunkers if they had positive market growth to tap into because one year of negative demand growth is building overcapacity," Sand said.
Fuel quality issues
As refiners and suppliers grapple with significant changes on fuel specifications as a result of the lower IMO 2020 sulfur cap rule, quality in low sulfur marine fuels is a key issue BIMCO has been watching closely.
"The issue of quality for fuel specifications that has taken our attention at BIMCO...looking forward we are going to be following it very closely to assist members with sharing our insight and knowledge," Sand said.
"We highlight high sediment fuels, low flash point fuels, high abrasive fuels and high density fuels as quality issues we are following closely with low sulfur fuels."
Also, "for aspects on board ships it has been a challenge to make sure that the lubrication of the engine and the pistons are done correctly because optimization of that is done in parallel with the fuel."
As a result of the change in fuel specifications from the reduction in sulfur content, companies called attention to the requirements on marine lubricants.
For example, "the anticipated wide range of fuel characteristics and potential instability of VLSFO blends will increase the deposit handling capability demanded from cylinder lubricants, while the low sulfur content will reduce the requirement for acid neutralization," lubricant additive supplier Lubrizol said earlier this year.
Expected strength in demand for IMO 2020-compliant marine gasoil this year was bucked when many bunker buyers showed preference for 0.5%S marine fuel.
At Europe's largest bunkering hub in Rotterdam, sales volumes in the first quarter of 0.5%S marine fuel rose 16% compared with the previous quarter, while marine gasoil dropped 6.8%, according to data from the port authority.
"It was a surprise that marine gasoil demand did not pick up more as a result of IMO 2020, but we see it caused by the fact that the bunkers market is very much a suppliers' market," Sand said. "It is a higher margin for refiners to deliver very low sulfur fuel oil as opposed to distillate-based fuels as marine bunker fuels is basically a waste/residual product."
As well as affecting expectations from IMO 2020, the coronavirus pandemic changed course for oil products globally when it cast a shadow over demand.
One key topic the maritime industry has been following closely is the narrowed spread between 0.5%S marine fuel and 3.5%S fuel oil -– a key pricing indicator used to determine investment payback periods for scrubber installations.
The premium of 0.5%S marine fuel over 3.5%S fuel oil delivered-Rotterdam was $46/mt on May 28, having started the year at $296/mt, Platts data showed.
"The price relations will normalize, meaning that the spreads...in current market will not be the case a bit further down the road...Our expectations are that the market will normalize to a spread of somewhere between $100/mt and $200/mt," Sand said.
"A narrowing price spread has taken everyone by surprise but we also have consider how many other surprises have we seen with a market that is absolute crazy at the moment...it is not normal times".