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As Environmental pressure grows on the oil industry due to their role in carbon emissions, so the shipping industry, which was exempt from the Kyoto protocol on cutting carbon emissions, has come under increasing scrutiny to catch up with other more strictly regulated industries.

Airlines have responded to this pressure and promised to cut annual carbon dioxide emissions of 650 million tonnes by 50% by 2050. That amount of emitted greenhouse gas is half that produced by the global shipping industry so the need for emissions and sulphur limiting legislation is evident within the marine industry.

What is still unclear is how an industry that has been massively hit by the global economic slowdown, will cope with the costs associated with cleaner and thus more expensive fuels. This report will analyse the implications of this legislation on the industry and any solutions there may be for the industry’s survival.

Implications of the MARPOL legislation

Firstly, the most pressing implication for those in the industry is the higher price associated with the switch to cleaner fuels as they are of course more expensive to produce. The largest cost for an operator is their bunker costs. When bunkers are $200/mt, ships will move at higher speeds but when prices double and ship values are halved or worse, ships will steam at economical speeds to burn less bunkers, saving out of pocket expenses.

If a ship that can do 18 knots on 33 mt of intermediate bunker fuel per day slows to 15 knots, they will burn only 25 mt/day and will also take 20% longer to get to where the ship is going. Consequently, if the ship saves 8 mt a day with bunkers at $400/ mt they save $3,200/day, so with a timecharter value of a ship at $20,000/day, 20% of that is $4,000/day, meaning it would not pay to slow-steam.

However, if the timecharter value of the ship was $10,000/day, then the extra time would cost $2,000/day and the bunker costs they saved would still be $3,200/day, meaning $1,200/day savings. Then it does pay to slow-steam.

The practice has been in use for over a year on several tanker routes already but the global economic slowdown combined with over-ordering, particularly in the tanker markets, has caused a tonnage demand/supply imbalance. When tankers take longer to complete their journeys they are out of the spot market for longer, which can help lend some support to the market.

Source: Platts

In the tanker spot market however, it is the charterers’ decision to allow slow-steaming and owners must seek their approval for this to take place. Nevertheless, slow-steaming had been cited by tanker sources as providing an ongoing relief from the overcapacity in the market. With ever cleaner fuels increasingly costing high amounts, the practice of slow-steaming will become more and more prevalent, sources in the tanker market believe particularly if the low-sulphur premiums seen in the past re-emerge once the global economies pick up.

The graph shows the premium for low sulphur 1.5% 380 cSt bunker over high-sulphur 380 in the port of Rotterdam over the last two years. This peaked at $100/mt in 2008 although was typically around $35-40/mt that year. A slow-down in demand in 2009 brought that back down to $15-20/mt.

The greater expense is not of course restricted to marine fuel oil with lower sulphur distillates also being stronger. Platts began assessments of marine gas oil in the same port at the beginning of this year and the current premium over marine diesel oil shows that the cost to shippers of the switch to the former fuel was a premium of $20-40/mt. This of course varies according to market conditions and in spite of tankers storing huge quantities of gas oil off the coasts of Europe. Admittedly, however, this gas oil needs to be blended to marine specifications.

Another implication, with particular regard to the January legislation, is enforcement. The legislation itself states that fuel changeovers must be recorded in ships’ logbooks, a process which many sources have questioned and only time will tell how successful this method of self regulation will be.

As EU ports realised that ships’ distillate use will move entirely from marine diesel oil to marine gas oil due to the sulphur cap, they saw demand for diesel fall away from the middle of 2009. Although some traders feel that the better supplied gas oil market may actually lead to prices for gas oil coming down. “More demand will gain influence of the price, but I do not think the prices will go up massively, because on the MGO side we have a lot more [supply] competition,” one trader said.

“As vessels have to use gas oil 0.1% in port from the new year and many vessels are starting to run on gas oil [so there’s] not a lot of demand, one has to stop buying, the sellers are stopping to put it on the market and so we have had to get rid of our dmb barges,” one trading source in Rotterdam said. However, while many traders and suppliers saw the buying patterns for distillates shift well in advance of the EU legislation, changes to storage had not been so successfully migrated.

“We have enough barges for MGO but tank storage is tight for the moment in all parts of Hamburg. We need storage tanks and this will be a problem, because for now we have a lot of tanks for fuel or MDO but not for MGO. So we have to clean tanks etc, which costs a lot of money,” a source in Hamburg commented.

As the new legislation comes into force and sulphur levels are cut further and further, the bunker industry and shipowners are already looking at their options to meet the new requirements. However, the biggest concern is what the increased pricing will do to the balance sheets of an industry already suffering from the global economic downturn and in many sectors a heavy order-book.

The price of ship fuel is going to become and an ever more important consideration.

You may be interested to know more about Platts Shipping newsletter titles as well as our real-time services:

Platts Bunkerwire

Delivered daily direct to your desktop, the new and improved Platts Bunkerwire gives comprehensive coverage of marine fuel prices and supply in major ports worldwide.

Platts Clean Tankerwire

Provides you with the latest tanker freight and fixture rates, giving you the full picture and enabling you to effectively analyse the tanker market.

Platts Dirty Tankerwire

Delivers the most important developments in the dirty tanker market, daily, direct to your desktop. Plus, with a new and improved format, it’s now a faster read with more direct access to key market content at your fingertips.

Platts Marine Alert

Platts Marine Alert is the complete real-time information and news service tailored for shipowners, tanker charterers and shipping traders and brokers. With access to timely data you can track movements in the industry.

To find out more about our Shipping suite of products visit www.platts.com and choose ‘Shipping’.

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