30-01-2017

Headwinds far from over for global bunker industry

bunkerfu

If 2016 was a tough year for the global bunker industry, keeping margins to a bare minimum and forcing business closures, 2017 is unlikely to see a dramatic turn towards the better.

For delegates attending a bunkering convention in Dubai, the industry is clearly not out of the woods yet — a cocktail of bearish demand fundamentals, feeble global economic outlook, anticipated U.S. trade protectionist policies and the scramble to implement new regulations in the maritime sector will keep the industry on tenterhooks.

But it’s not just dark clouds all over the place. Recovering oil prices certainly offers a ray of hope for the bunker industry, which is hoping it will help their earnings to recover. In addition, while industry officials see the plethora of new regulations coming into place as short-term pain, they were vocal in their view that this would bring long-term gain.

“I think global demand for bunkers will be steady or slightly less compared to last year. This will lead to even tighter margins for bunker suppliers,” Robin Meech, who is both managing director at Marine & Energy Consulting (MECL) as well as chairman of the International Bunker Industry Association (IBIA), said along the sidelines of Petrospot’s Middle East Bunkering Convention.

As a result, some companies will undertake more cost-cutting measures resulting in redundancies, he said.

According to Cockett Marine Oil Group CEO Cem Saral, the net physical marine fuel demand for oceangoing fleet was estimated to be around 250 million-285 million mt last year and this figure will likely remain stagnant in 2017.

The growth of the shipping fleet is still a concern despite the expected amount of scrapping activity. Regulations such as ballast water management will likely encourage more scrapping but it won’t be enough to address the supply overhang, he said.

Marine fuel sales in Singapore, the world’s top bunker port, rose 7.7% year on year to 48.6 million mt in 2016, surpassing 2015’s record high of 45.2 million mt, data released earlier this month by the Maritime and Port Authority of Singapore showed.

Bunker sales in Singapore could grow this year too but that increase is expected to come due to displacement of demand from some other ports, sources said.

Bunker demand has also ebbed due to various cost-cutting, energy saving initiatives by the shipping industry including slow steaming, using larger vessels, and more fuel efficient technology, sources said.

POLICY OUTLOOK CASTS SHADOW

In 2016, China, the world’s second-biggest oil consumer, posted its lowest GDP growth since 2009, at 6.7%. This has clouded the outlook for China’s oil demand, which would further extend the pain for the country’s bunker industry.

In addition, US President Donald Trump’s decision to drop the Trans-Pacific Partnership (TPP) accord and move swiftly to act on other trade pacts such as the North American Free Trade Agreement (NAFTA) — a three-country accord negotiated by the governments of Canada, Mexico, and the US that entered into force in January 1994 — will also likely be negative for shipping, sources said.

“There will be more protectionism even though we would all like to believe there will be free trade,” J. Stephen Simms, principal at Simms Showers LLP said. “Nationalism will likely rise in global politics and it will be a challenge for our industry.”

Elsewhere, sources are also seeking cues from the upcoming Brexit parliamentary vote to determine how trade patterns could change there.

RECOVERING OIL PRICES A SILVER LINING

Crude oil prices are usually expected to have a strong correlation to bunker prices. According to Platts data, Brent crude and Singapore IFO 380 prices showed a correlation of around 0.55 for the period from December 14, 2016, to January 26, 2017.

“Our forecast is that Brent will average $55/b in the first quarter of 2017 and $60/b in the second quarter,” Frank Lausen, oil risk manager at Global Risk Management said at the industry event, adding that OPEC supply cuts were supporting prices.

“The front month versus one year forward contango is expected through 2017,” he said. “However, the contango could temporarily narrow at times [due to] upward pressure at front from crude draws and managed money or downward pressure on forward prices due to waves of producer hedging.”

At the end of last year OPEC reached a landmark deal to cut 1.2 million b/d to about 32.5 million b/d for six months starting in January. There is an option to extend the cuts until end of the year.

Still, the industry remains skeptical about how long these cuts might last. Compliance to the cuts is likely to be around 60%-70%, according to some sources.

REGULATIONS AND TECHNOLOGY

A plethora of new regulations is about to greet the bunkering industry. The key one, according to some sources, is the International Maritime Organization’s global sulfur cap. Although this regulation will kick off only from 2020, sources said the industry is expected to start preparing for it actively from this year.

The decision will force ship owners either to switch from burning fuel oil to more expensive, cleaner fuels or to install emissions-cleaning scrubbing equipment on board their vessels.

“On the supply side, we will see an increased investment in scrubbers as a prelude to IMO’s 2020 global sulfur cap,” Meech said.

By the end of 2016, sources estimated that only about 460 ships had scrubbers with around 4 million mt estimated to be scrubbed, Meech said in his presentation. MECL expects the number of ships with scrubbers to rise to as high as 22,000 in the year ending 2030, with about 142 million mt estimated to be scrubbed in 2030, he said.

The industry will also be monitoring the results of Singapore’s mass flow meters mandate for custody transfer of marine fuel oil.

MFM measures the transfer of bunker fuel between the supplier and buyer.

The number of inquiries from suppliers to install MFMs has continued to rise since Singapore mandated their use, said Douglas Raitt, regional consultancy manager at Lloyd’s Register Marine & Offshore.

Some other ports may also follow Singapore depending on its success in the city-port, sources said, adding that this could lead to a huge reduction in quantity claims.

Quality claims could, however, rise as fuel management challenges increase and become more complex to meet the global sulfur cap requirements, they said.

Source: Platts 

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