Supply chain radar: APMM hunts bolt-on deals, hopes to hedge new low-sulphur regulation risk
Danish shipping behemoth AP Møller–Mærsk (APMM) has an interesting take on what’s happened to world ...
Doomsday predictions surrounding the IMO 2020 sulphur fuel cap and its impact on container lines are unfounded, according to Alphaliner chief analyst Tan Hua Joo.
Speaking yesterday at the TOC Asia Container Supply Chain conference in Singapore, Mr Tan poured scorn on projections of market chaos and carrier bankruptcies.
“This is the most important subject for the industry in the coming months,” admitted Mr Tan, “but there’s been some pretty catastrophic predictions being made, and while there’s a lot of uncertainty on IMO 2020, I don’t think these dire predictions are entirely justified.”
For example, he said, estimates of the new regulation costing up to US$50bn were overblown. Instead, he suggested a cost of around $10bn on an annualised basis, adding that this would be the “top end, and the likely cost will be much lower”.
Furthermore, Mr Tan said, carriers had shown resilience in overcoming past major challenges wrought by new regulations. Sulphur Emission Control Areas (SECAs) in 2015 and the VGM container weight regulation in 2016, for example, both entailed similar confusion and apparent lack of preparedness. Nonetheless, both events passed with almost zero market disruption and high compliance, he said.
However, he added: “Having said that, a $10bn bill is still extremely large one for the industry to bear, and it’s certainly the costliest IMO rule that’s ever been attempted,” he added.
The biggest point of uncertainty remains the cost of new low-sulphur fuel oil (LFSO) and the currently used heavy fuel oil (HFO). Mr Tan pointed out the current spread between HFO and the 0.1% sulphur fuel required for SECA – significantly less than the 0.5% global cap for IMO 2020 – is around $200.
“And the cost of producing 0.5% LFSO is very likely much lower than for the 0.1% spread,” he explained, cautioning that initially it could be higher since it would take time for the new fuel’s supply and demand dynamics to level out.
“Any teething problems will be resolved relatively quickly, certainly within 12 months, and I expect the spread to become significantly below $200.”
Plus, Mr Tan noted, three years ago HFO cost $600 a tonne, compared with the current $400, meaning there is room for the industry to absorb the extra costs on the horizon.
Another key factor in play is carrier uptake of scrubbers, with demand for the exhaust gas cleaning systems, which allow carriers to continue burning HFO, surging in recent months after an initial period of inertia, according to Mr Tan, who said the “economics of scrubbers are so compelling that even Maersk changed its mind on them”.
He added: “Right now there’s a real sense of urgency from shipowners to take action, and scrubber orders are constantly increasing. Based on the data we’ve collected, more than 20% of global container capacity will be on ships with scrubbers by the end of 2020 – much higher than initial predictions of 5-10%.”
One potential danger of the increased scrubber uptake is how carriers will react if the fuel cost spread is higher than expected.
“If the spread turns out to be higher than I predicted, then those with scrubbers will have a significant cost advantage; how they’ll use this to price and gain market share remains to be seen,” he warned.
Interestingly for shippers, perhaps, is Mr Tan’s assertion that carriers are down-playing their scrubber strategies so as not to disturb the narrative on the need to recover the higher fuel costs from customers. He claims carriers’ bunker adjustment factor (BAF) formulae are not transparent, since most are based on 100% usage of LSFO and don’t take scrubber usage into account.
Mr Tan said a bonus for carriers from increased scrubber uptake was the resulting temporary reduction in capacity, with vessels requiring 30-40 days in a shipyard for the retrofit.
This year, 200 ships, totalling 2.4m teu in capacity, will be removed from the market for scrubber installation. This translates to 30 ships a month, or 300,000 teu, representing 1.3% to 1.5% of total global capacity.
“It’s not a big number, but anything that reduces supply is positive news for the shipping lines at this point,” he noted.