An article in its Foresight series published by shipping analysts Maritime Strategies International (MSI), suggests that ships fitted with scrubbers will attract premium time charter rates for some considerable time as the impact of the 2020 fuel changes filter through.
The article authored by MSI Senior Dry Bulk Analyst Will Fray begins by pointing out that using today’s prices, a Panamax burning 32 tonnes of fuel per day will see its daily running costs increase by $8,500 by switching from HFO to MGO. Taking into account the current daily rate for this type is just $12,000 per day, the benefits of chartering a vessel with a scrubber as opposed to one without is huge.
Starting with time charter rates, all else being equal a charterer would pay a premium to charter a vessel fitted with a scrubber, theoretically up to a maximum of the expected fuel cost saving minus additional running costs. In practice, some discount will be applied due to operational risk associated with scrubbers, in case of equipment failure for instance.
Elsewhere in the article, Fray says, Commercially, there is an incentive for both sides (owner and charterer) to negotiate a cost-savings sharing agreement for a vessel fitted with a scrubber, based on the undoubted difference in expectations for fuel costs between the parties. Conceptually, for long-term charters, the charterer may even offer to pay for the installation of a scrubber on a vessel in order to take advantage of fuel cost savings.
In the VLCC market, Q3 18 has seen long-term charters for scrubber-fitted assets begin to define the market differential, for instance. In an illustrative case, should an owner of a vessel with a scrubber expect LSFO vs HFO fuel price differentials to widen over the charter period, but the charterer expect fuel prices to narrow, then it is in the interest of both parties to maximise exposure to fuel price changes. Therefore, an agreement might be made to fix the vessel at a relatively low premium to a standard (non-scrubber-fitted) vessel, with an appropriate arrangement to share fuel savings over the period of the charter. The share of total fuel saved will be agreed depending on the relative difference in fuel price expectations between parties, net expected scrubber running costs.
By MSI’s calculation, in 2020 the value of the time charter premium for a Capesize benchmark vessel fitted with a scrubber will be $12.1 k/Day, for a Panamax $7.1 k/Day, Ultramax $6.3 k/Day and Handysize $5.1 k/Day. Considering the daily-equivalent cost of a financing, fitting and operating scrubber is a fraction of this, the financial incentive to fit a scrubber is strong.
Looking ahead, In MSI’s view, the price differential between LSFO (compliant blended fuel composed of fuel oil and low sulphur diesel) and HFO bunkers will remain significant beyond 2020, sitting at the top end of the historical premium range between HFO and MGO which has ranged between c. 60-120% since 2000.
MSI would expect blended fuel and MGO prices to be comparable, given the ability of shipowners to use both as a compliant fuel. According to MSI, there are essentially three routes to increasing production of low sulphur compliant fuel:
a) increasing crude throughput, resulting in a higher volume of middle distillates produced, but also additional (surplus) fuel oil,
b) increasing the refined share of middle distillates; this requires potential ‘yield switch’ or investment in secondary refinery units, and
c) investing in desulphurisation capacity to remove sulphur from fuel oil (expensive, and currently take up is low).
The availability will differ by region, with Europe and SE Asia likely to be key distillate-short regions.
MSI sees compliant fuel blends beginning to be introduced in 2019. And in 2020 expects a dramatic drop in fuel oil consumption. Increased MGO use, along with blended fuel, will fill the majority of the gap, with blended fuels taking a greater share beyond 2020. Fuel oil use will also rise as scrubber adoption gathers pace, and in the long-run, LNG use will increase, albeit from a low base, remaining a bit-player in the global bunker mix across MSI’s forecast horizon.