Four Reflections On IMO 2020
IMO 2020, or ‘MARPOL Annex VI, regulation 14’ as it was less memorably known back when we started preparing for it in 2018, was always going to bring huge changes for shipping.
For some people it was even going to be as substantial as ships’ switch from coal to oil in the early 20th century. Those predictions have fortunately proven to be unfounded so far, but there hasn’t been any shortage of challenges for our industry in the wake of IMO 2020’s arrival.
During the last few weeks as we’ve been concluding our merger with OceanConnect and I’ve had a chance to reflect on how far we’ve come this year.
- It’s easy to forget that crude prices started to slide not only because of Covid-19 in February and March, but also due to disagreements within OPEC+ about how much oil they should produce. Covid-19 has reduced demand for oil, and created a huge glut of both crude and refined products. Even if a vaccine emerges soon, we’re unlikely to see this oversupply abate entirely; not least because countries like Venezuela, Libya, and Iran with huge crude reserves are currently ‘offline.’
- At times in January it looked as though shipowners who’d invested in scrubbers for their fleets could see payback periods of less than two years in some cases. By March, however, the spread between 3.5% HSFO and 0.5% VLSFO dropped to as low as $40 a tonne from over $300, and payback periods are now commonly assumed to be at least four or five years. We’re unlikely to see sustained interest for retrofitting scrubbers as long as the spread remains low. On newbuilds, I’m slightly more optimistic about positive economics.
- By common estimates, the three biggest cruise lines, Carnival, Norwegian, and RCCL together on average consumed about half a million tons of bunkers each month in 2019. For context, that’s more than 10% greater than total fuel sales of Panama registered by the AMP. Especially for physical suppliers in cruise hotspots like the Caribbean, which supports about a third of global cruise voyages, bunker demand is unlikely to return in full before 2022 at the earliest.
- The bunker price volatility we’ve seen this year – and in many previous years – is a textbook example of why it pays to consult with your marine fuels supplier to help manage this risk. I was talking to a longstanding client last week, and for her there are three big advantages to be gained from hedging and risk management: Reduced volatility reduces cost of capital; knowing there will be no abrupt cost increases means that they can more easily plan ahead; and by smoothing out revenue and expenses they know they won’t need to borrow on unfavourable terms because they’ve got good liquidity.
The merging of KPI Bridge Oil and OceanConnect brings together a wealth of knowledge and expertise, new ideas and ways of thinking, and a renewed energy to a changing marketplace. There’s no shortage of challenges ahead for the shipping or bunkering markets, but I’m very optimistic about the company we’re building and the value we can provide.
Written by Søren Høll, CEO of KPI OceanConnect