New regulations cutting the sulphur content in marine fuels are set to shake up the global shipping and oil-refining industries. From January 2020 the maximum sulphur content of marine fuels will plunge from 3.5 per cent by weight to just 0.5 per cent. We expect immediate supply-demand mismatch, with cleaner fuels in short supply while a significant amount of high-sulphur fuel will be left unsold.
There has been only limited preparation for this change so far, so the refining and shipping industries will have to react with expensive quick-fix options before long-term investment brings the market back to balance. The transition will take several years, in our view, with equilibrium not restored until the middle of the next decade.
Shipping accounts for about 10 per cent of oil used in global transportation, or 4.4m barrels a day in total. The current maximum allowable sulphur content in marine fuels of 3.5 per cent is 3,500-times greater than standard specification diesel used in European road vehicles. One container vessel consuming 80 tons a day of high-sulphur fuel emits the equivalent in sulphur oxides of 46m light-duty diesel vehicles running on Euro-spec diesel.
To cut air pollution caused by the shipping industry, the International Maritime Organisation, a specialist United Nations agency, agreed in 2008 to reduce the limit. But both the shipping and refining industries have taken few steps to prepare for these so-called IMO 2020 regulations and are only belatedly starting to take notice.
Reacting now, however, is like turning around a giant oil tanker in mid-ocean. The implications are huge, not only for shipping but for shipbuilding and refining too.
The shipping industry will have to pay a significantly higher price for cleaner fuel and the survival strategies chosen by its participants will lead to substantial restructuring of the sector.
The refining sector's role will be to convert more dirty fuel into clean fuel. Excess high sulphur fuel will have to be disposed of at significant price discounts, while we expect diesel demand to surge by up to 1.7mbd, or 5.2 per cent, at the peak in 2020.
Shipping companies currently have three main options for cutting sulphur-oxide emissions. They can use low-sulphur fuel, switch to liquid natural gas, or add 'scrubbers' – exhaust gas cleaning equipment – to existing ships to enable them to continue to run on high sulphur fuel oil. The lead time on new ships, and the shipbuilding industry's limited capacity for retrofitting scrubbers to the existing fleet, means we expect the majority of ships will initially switch to using low-sulphur fuels, despite their current significant price premiums.
The shipbuilding sector should benefit from stronger demand – particularly in orders for high-spec energy efficient new vessels. However, the shipping companies are facing higher costs of moving cargo as insufficient availability of cleaner fuel or scrubbers drive up fuel bills.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Gordon Gray
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