Upcoming IMO sulfur regulations are expected to be felt most acutely by the maritime shipping industry—and persist in doing so well beyond 2020. A closer look at the scope of impact, however, reveals rippling effects of these regulations throughout the transportation supply chain that could have dramatic implications for intermodal and over-the-road shipping as well.
This is largely due to a key shared element between all three forms of transport: fuel. Now, industries that have historically used fuel from different parts of the barrel are vying for very similar product. As volatility persists in the refined product marketplace due to several key factors, and output tries to keep pace with demand, competition for low-sulfur middle distillates between the maritime shipping industry and other modes of freight transportation will intensify.
Price impacts of such competition and their effect on global supply chains will likely alter land transport dynamics and add increased complexity for shippers with goods that move along multiple legs in a journey from sea to land.
IMO 2020-Compliant Fuel Distributions
To meet the new 0.5 percent sulfur specification the IMO 2020 regulations mandate, carriers are faced with several compliance options, including diversifying their fuel portfolio to meet these new standards, adding scrubbers, or opting for alternative fuels such as liquefied natural gas (LNG). While some have made strides in adopting LNG capabilities in their fleet or installed scrubbers that enable the use of the high-sulfur fuel oil, most are making the switch on vessels to low-sulfur fuel oil—and accepting the accompanying fuel price volatility.
This transition is demonstrated in the chart above, which compares the fuel types consumed by the maritime industry today with projections of fuel consumption in 2020. According to International Energy Agency (IEA) estimates, low sulfur fuels are projected to account for between 85 to 90 percent of compliant fuel selection when the January 1 regulation takes effect.
Perhaps most surprising is the expansion in use of marine gas oil (MGO) to 2.0 million barrels per day. Although it remains the most expensive compliant fuel on the market, MGO product is advantageous as an available and tried-and-true product with little potential for disruption on vessels compared to newer fuel formulations. After MGO, the next most attractive choice will likely be very low sulfur fuel oil (VLSFO 0.5 percent sulfur), with demand climbing to about 1.0 million barrels per day.
Conversely, use of high-sulfur fuel oil (HSFO) is expected to decrease by nearly 58 percent from 3.3 million barrels per day to 1.4 million, with a little more than half used in vessels with exhaust gas cleaning systems, or scrubbers, and the rest in vessels choosing non-compliance, leaving HSFO as the third most preferable fuel choice. LNG and other alternative fuels will experience the slowest rate of adoption and continue to have a very small market share.
Slow Steaming to Reduce Fuel Consumption
Beyond the fuel they utilize to comply with the sulfur cap, carriers may also explore strategies to cut down on the quantity of fuel consumed. One such strategy is that of slow steaming. First adopted as fuel prices were rising in the early 2000’s, slow steaming involves conducting vessels at speeds near 18 knots for portions –and in some cases the entire duration— of a voyage.
Up to a certain threshold, the slower a vessel travels, the more efficiently it consumes fuel. The chart below demonstrates the scalable factor at which this occurs regarding speed with fuel consumption.
While slow steaming may reduce consumption, a significant drawback is the additional voyage time implication for vessels, which could pose problems for beneficial cargo owners (BCOs) who want to move their goods at a faster pace. Additionally, carriers already employing the practice of slow steaming may not be willing slow their vessels further.
Changing Refining Schedules
As the daily demand for low-sulfur products like MGO and VLSFO increases by nearly 2.0 million barrels, refiners are also feeling the pressure to increase output. To account for this surge, refiners in the U.S. and Europe, and even Asia, are altering maintenance schedules to produce more low-sulfur middle distillates in the latter half of 2019.
Refinery maintenance season typically occurs multiple times over the course of the year, for example in spring or fall, following periods of high demand and in preparation for operators switching seasonal product blends. As 2020 approaches, however, refiners are increasing available online capacity near years’ end, performing in the spring the routine maintenance that typically would take place in autumn. This shift allows refiners to both increase production, and capture higher margins as demand rises.
Despite this potential for increased output, however, both the maritime and over-the-road freight industries are also bracing for significant fuel price volatility.
IMO 2020 Impacts on OTR Freight
Increased overall demand for low-sulfur middle distillates is anticipated to present upward price pressure not only for marine fuels like MGO and VLSFO, but other products as well including the ultra-low-sulfur diesel (ULSD) consumed when moving freight inland.
Although marine vessels do not run on ULSD, all the aforementioned fuel types affect demand for middle distillates, meaning that what once were two industries reliant on completely different fuel stocks have now entered into the same competitive arena for product.
Impacts of IMO 2020 may therefore be felt by inland distributers, as diesel prices climb in the second half of 2019. The IEA projects diesel and gasoil prices could increase by one-fifth in 2020 under their base case, to a level in which prices would impact demand for these fuels. The duration of these IEA estimates for higher prices will be directly impacted by the pace in which demand growth slows.
How Shippers Can Minimize These Effects
With IMO 2020 regulations looming ever closer, shippers can expect to feel the impact of these changes in areas they may not have previously anticipated. Low-sulfur mandates will create consequences that extend beyond maritime freight and reach the complex global supply chains shippers and BCOs utilize today.
To prepare for this, shippers who utilize a program enabling them to understand the mechanisms behind underlying costs of their transportation fuel spend will be more able to respond to changing energy market dynamics. With the visibility provided in Breakthrough’s solutions for both marine and over-the-road fuel management, and our custom fuel price forecasting, shippers can develop proactive, instead of reactive, strategies that help them navigate the complexity of their freight movements.
To learn more about effective marine fuel strategies your organization can use as 2020 approaches, please visit our solutions page.