NOTOS NEWS | IMO 2020

IT IS ALL ABOUT THE SPREAD
The new IMO 2020 regulations are requiring vessels to use sulphur reduced fuel or other measures in order to limit the sulphur oxide (SOx) content in the exhaust gases arising after combustion. Limiting SOx emissions from ships will improve air quality and protect the environment.

The challenge for owners is to comply with the new requirements in the most cost-efficient way. And this is all about the spread: The price spread between a conventional fuel containing 3.5% sulphur and a fuel compliant to IMO 2020 regulations with a content below 0.5% determines the most efficient approach.

Below in this article you will see the comparison calculation of bunkering a compliant fuel against the installation of an on-board facility washing the exhaust gases, a so-called scrubber, allowing the owner to still use conventional high sulphur fuel oil (HSFO). This spread is the determine factor for the amortisation time of a scrubber. The higher the spread, the more you have to pay for a compliant fuel compared to HSFO. A higher spread gives a shorter amortisation time of a scrubber. In theory, this is simple mathematics.

THREE REALISTIC OPTIONS
In real life it is a bit more complicated as owners have three realistic options to comply with new regulations from 1 January 2020 on:
1. Low sulphur fuel oil (LSFO), 
2. Marine gas oil (MGO) and 
3. the installation of a scrubber, allowing you to continue using standard HSFO.

LSFO - NEW BLENDS WITH LIMITED AVAILABILITY
If owners choose to go for LSFO, they will enjoy a rather low increase in fuel cost but have to accept the disadvantage that by now there is no ‘standard recipe’ for LSFO. LSFO is produced by a variety of methodologies differing from supplier to supplier. Different blends may be incompatible to each other and may cause damage to engine equipment if mixed. Having this in mind, the availability of the preferred LSFO may be limited in the beginning, especially in smaller ports.

MGO - CLEAN BUT EXPENSIVE
Secondly one could go for MGO, a clean, ubiquitous standard fuel that even enhances the lifetime of the components by about 50%. In addition, it also has a higher caloric value. Sounds like a good option, but the fuel bill will be higher compared to the LSFO option and, if demand for MGO increases, the price will go up even further.

SCRUBBER – QUICK AMORTISATION
The third option is the scrubber. A scrubber is a rather expensive facility washing the exhaust gases reducing the SOx content to the required level.

This brings us back to mathematics. Assuming a scrubber costs USD 3.5m for a vessel burning 30 tons a day, the chart below shows the break-even spread of a scrubber investment depending on the remaining lifetime of the vessel.

For example, in case of an average price spread between MGO and HSFO of USD 200, the amortisation time would be approximately 21 months.

This sounds like a reasonable option to be considered for vessels which are not supposed to be scrapped in near future. However, the availability of scrubbers and yard slots is very limited these days.

The chart below shows the Rotterdam price spread from the past between MGO and HSFO (HFO 380 cst). Over the last two years the average spread was approximately USD 200, before that the spread slowly came down from highs of almost USD 400 eight years ago. Of course, there also is a spread between LSFO and HSFO to be considered. However, we regard this spread available today not to be very reliable yet as the quantities traded are still limited.

ALL OPTIONS IN USE
Shipping companies are dealing differently with this challenge. Consensus among analysts is that each option is most likely to be adopted roughly equally.

Nevertheless, overall it can be seen that in particular young and large ships are or will be equipped with scrubbers. Owners of older units rather tend to use LSFO. However, it is hard to say which option is the best as the development of bunker prices and the spread between is very uncertain.

Here are some examples of how shipping companies are dealing with the IMO 2020 challenge: Tanker company DHT Holdings decided to equip their fleet with scrubbers. In contrast, Belgian-based Euronav chose not to do so. On the dry bulk side, Star Bulk has installed scrubbers on 34 vessels so far and expects to have completed 104 by year-end 2019. MSC, the world’s second-largest liner company, is expected to have over 200 units to be installed. And French CMA CGM will use scrubbers on part of its fleet and LNG to power nine of its future ultra-large container ships.

Thus, even within a shipping company, different options can be in parallel use. It all depends on owner’s expectation of the future spread. May the spread be with you.