4/21/2010

Budget and cost stability in the new “low-sulphur” fuel world



As the revised Marpol Annex VI Low Sulphur switching deadline approaches, many questions and concerns are raised by the global maritime community regarding low sulphur product availability, cost and quality issues

 

Vessels sailing in the Baltic and the North Sea, also known as Emission Control Areas (ECAs), will be obliged to burn maximum 1% sulphur content bunkers starting July 1st, 2010. This quick, one-time change is expected to introduce many disruptions and volatility to the market in the short term.
 
According to Robin Meech of Marine and Energy Consulting Ltd., global demand for 1% LSFO will initially be around 11 million tonnes in 2010, doubling to around 20 million tonnes in 2011 and more than quadrupling to around 48 million tonnes by 2014. Then, the global maritime community will be facing even more stringent ECA regulations for switching to 0,1% sulphur content by 2015.
 
 “Refining and/or blending and providing the initial 11 million tones of 1% intermediate fuel oil from scratch will be a costly process and I see the LSFO – HSFO premium gap widening up to 75$/MTs during the summer months of 2010 as the global fleet makes necessary adjustments” says Robin Meech. Currently, this premium is trading around 20$ to 30$/Mts depending on the port. In a recent Bunkerworld article it was mentioned that inquiries about 1% sulphur IFO were increasing in number and that some suppliers and traders were uncertain about future availability of such products.
 
Future supply-demand imbalances in the ECA area, increased cost of sulfur reductions and the current upward trend of oil prices pose a great threat to budget, cost and operational stability of vessel operators. Fuel price risk management strategies become more important and vital for bottom line profit margin protection during such turbulent times.
 
Specialising in the niche market of oil price risk management, Global Risk Management can provide many different financial and physical tools that enable shipo wners and charterers to fix their short and long-term fuel exposures. Utilising Fixed Price Agreements (FPAs) with guaranteed physical supply in the ports of choice might be the most efficient method for achieving cost and operational stability during volatile times.
 
On the other hand, operators with no port certainty but with strong regional focus in the ECA area can benefit from using generalised financial risk management tools such as Swaps and Caps, eliminating bunker price volatility.       
 
 
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