Consequences of IMO 2020

January 2020 saw a new limit on the sulphur content in the fuel oil used on board ships come into force, marking a significant milestone to improve air quality, preserve the environment and protect human health. Known as ‘IMO 2020’, the rule limits the sulphur in the fuel oil used on board ships operating outside designated emission control areas to 0.50% m/m (mass by mass) – a significant reduction from the previous limit of 3.5%.

The implementation of IMO 2020 represented the most dramatic change to ships’ propulsion since the end of coal bunkers, and the beginning of a transition to decarbonisation that will alter the marine fuels market, as we currently know it, beyond recognition. In conjunction with the logistical challenges of Covid-19, as well as the impact of the OPEC+ oil price, this has made fuel compatibility and quality as well as finance a more prominent issue for shipowners.

Given the impacts of the virus, lockdown, oil prices and environmental imperatives on the whole fuel market and the implications for strategic planning and buying relationships we speak with Brian Coyne, managing director of KPI OceanConnect, one of the most experienced independent marine energy service providers, to consider the very specific issues related to marine fuels in the light of IMO 2020 regulatory obligations as well as how owners and operators can deliver cost-effective marine energy procurement strategies in this new, complex market environment

Brian explains: “IMO 2020 presented numerous new challenges for shipowners to consider before purchasing bunkers. Concerns about compliance, compatibility, and availability of fuels dominated but they were far from the only challenges the industry faced.

A need for trusted partners
One of the biggest ones was the interlinked demands of credit and creditworthiness. This stressed some industry balance sheets after years of volatile freight rates, and the higher cost of IMO 2020 compliant fuels made it much more difficult for smaller firms to keep doing the same level of business with their existing credit lines. When Covid-19 arrived, risks across the supply chain increased and created headwinds for many maritime businesses. We saw some companies who did not have adequate risk management in place go into insolvency. Although, the pandemic suppressed demand and subsequently prices, the market is rising again as vaccines are rolled out and demand returns to pre-pandemic levels.

At a structural level, the shipping industry has also seen a decline in capital availability for all but the strongest players. This is due to many large banks, such as ABN AMRO, Rabobank, and BNP Paribas, pulling out of commodity trade financing. This has created additional costs, liquidity and transaction complexities for shipowners and bunkering companies. Forensic due diligence has become far more common and a perception of lenient corporate governance in some corners of the shipping industry further inhibited banks from lending to the sector.

Fundamentally, this new dynamic highlights the need for trusted partners, acting transparently and collaboratively with customers and stakeholders across the industry to implement robust risk management strategies. As a result, tightening lending criteria are locking some firms out of the market and creating daily liquidity struggles for others. The bigger, better run players’ ability to meet these rising standards through robust and stable capital reserves and advanced risk management tools has been readily apparent.

Regional Disparities
Elsewhere, the compound effects of Covid-19 and IMO 2020 had different impacts on the marine fuels market. For bunkering hubs in some oil export regions, such as Fujairah, the decline in the number of tankers arriving to load crude cargoes has had a noticeable impact on total sales. Whereas in Singapore and Rotterdam, total volumes were up considerably year-on-year.

In major markets there has – for the most part – been plenty of IMO 2020 compliant fuels. However, in smaller markets and some regional niches it remains a complex challenge to procure compliant product. When I spoke to clients last year, the feedback was almost always the same: suppliers without a resilient global network and staff with local expertise are finding it difficult to consistently source the bunkers their clients needed.

With a continuation of oil price volatility and a price trending upwards, we also expect increasing bunker prices. In previous years when the price per barrel of WTI/Brent has risen, there have been reports of unscrupulous suppliers or feedstock providers using cheaper blending components. Unfortunately, our experience suggests that the impact of these changes are often detrimental to vessel operations.

Looking to the future

The environmental benefits of IMO 2020 are apparent. There has been a 70% reduction in sulfur oxide emissions thanks to the global sulfur cap with compliance levels strong. IMO also has an action plan for further air quality improvements.

Moving forward, we expect to see more consolidation across the sector as the transition towards future fuels and alternative sources grows. Consolidation, such as our merger of KPI Bridge Oil and OceanConnect Marine to form KPI OceanConnect, demonstrates that we are at the front, driving the change needed in our industry.

Partnering with an organisation that delivers advanced marine energy solutions on a global scale, by leveraging enhanced synergies and adopting a consultative approach, adds value for shipowners, operators, and charterers. Today, we are in a strong position and fully prepared for the rebounding bunker volumes, which are gradually starting to increase in line with the Covid-19 vaccination rollout.

The marine energy supply chain will transform immensely in the years to come, and there will be challenges ahead for the entire bunkering sector, as old, purely transactional processes are replaced with comprehensive consulting services. Implementing a comprehensive bunker procurement strategy to manage risks is crucial as we continue to endure price volatility in the immediate, if not long term.

KPI OceanConnect is well positioned in the value chain to help the industry manage this new dynamic through its partnership approach, offering reliable and trusted expertise and real time market intelligence.

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