According to a Freight Waves article, for the trucking and transport industry which is looking at the start of IMO 2020 next year, with impacts to start hitting in fall 2019, one key equation that needs to be understood is that every ship that installs a scrubber to meet the rule does not need to buy fuel that is drawn out of the diesel pool.
Why is it so?
Each scrubber reduces ever so slightly the potential for higher diesel prices.
It wasn’t surprising then that two executives from the scrubber industry, in a webinar hosted by the transportation team at Deutsche Bank led by Amit Mehrotra, were bullish on the number of scrubbers that will be in the world’s marine fleet when IMO 2020 becomes law January 1.
Here’s the standard primer on IMO 2020 – it will require ships to burn fuel of no more than 0.5 percent sulfur content worldwide. The limit now is 3.5 percent sulfur. Two of the major ways of displacing that high sulfur fuel oil (HSFO) are either burning marine gasoil (MGO), which is a diesel product, or burning a new family of fuels generally known as very low sulfur fuel oil (VLSFO), which is heavily blended with a diesel intermediate product called vacuum gasoil (VGO). In either case, demand that had been supplied by the “bottom of the barrel” would be supplied instead by the middle of the barrel, the cut that now supplies diesel to the over-the-road trucking industry and to the rails.
The Parity Between Orders and Installations
Nicholas Confuorto, president and COO of CR Ocean Engineering, said on the webinar he expected that by January 1, the number of scrubbers on ships would be about 4,000 worldwide. This would be several hundred scrubbers more than most forecasts have been predicting throughout 2019. Between what’s been installed so far and what’s in the order books, that total is now about 3,700.
“I think by January we may see 4,000 ships with scrubbers, which is higher than estimates,” Confuorto said. He cited one specific estimate of 3,675 scrubbers.
Unclear Number, Not All Reporting
Although current “official” numbers aren’t pointing to a 4,000 total, Confuorto noted that not all vendors are reporting their numbers, “so that is why I think it’s going to be higher than that.”
“There are so many Chinese vendors that have now entered the market and they are not reporting into this total,” he said.
Scrubbers in Tonnage?
The other presenter on the webinar, Kevin Humphreys, the general manager of the merchant and gas carrier segment at Wartsila (OTC:US) noted that while the number of ships with scrubbers is expected to be somewhere around 9 percent to 10 percent of the world’s fleet, a more significant number is the tonnage. The ships with scrubbers will be more like 18 percent to 19 percent of the total tonnage in the market and by extension that percentage of current HSFO demand.
Quality A Concern?
Some of the vendors that have come into the market recently, according to Confuorto, “until six months ago had no idea what a scrubber was and suddenly they decided to start selling scrubbers.” The act of scrubbing sulfur (specifically SO2) out of exhaust is not complicated, Confuorto added; it’s been done for years.
Humphreys said he is specifically concerned about the quality of the steel being used by some of the new entrants into the field.
Growth Depends on Spread
Both presenters said their order books are filled and had been so as early as last autumn. But whether the growth continues past the current rush of new builds will depend mostly on one factor – the spread.
The spread is the general term used to describe the relationships among the three key products that will be used to meet IMO 2020 rules. What will be the spread between HSFO and both MGO and VLSFO? (The latter product is particularly important since that is the family of products that oil companies have focused on in rolling out a new line of IMO 2020-compliant fuels.) A ship outfitted with a scrubber can continue to burn HSFO because the scrubber will cut down the sulfur content in the exhaust gas to less than the 0.5 percent cap. But is the spread between it and MGO and VLSFO wide enough to justify the capital to install a scrubber on a ship, or a whole fleet of them?
Scrubbers Decision : Fuel Hedge Play?
Humphreys described the decision on installing a scrubber to be largely a “fuel hedge play.” The costs of installing a scrubber system on a ship has come down since when his company first started marketing them back when there were earlier marine fuel oil sulfur reductions in key coastal areas known as Emission Control Areas (ECAs). The International Maritime Organization – the IMO of IMO 2020 – began mandating lower sulfur levels in the ECAs back in 2015. But both Humphreys and Confuorto said the price of a scrubber had stabilized this year.
Spread Determines Payback Time
The spread(s) will determine the payback time on that investment, both presenters said. Confuorto said the payback – defined as when the capital laid out for the scrubber installation is eventually compensated for by the ability to buy cheaper HSFO – is “sometimes one year, sometimes two years at these prices. We expect that once fuel prices come into play the payback it will be one year or less.”
Humphreys cited a two to three year payback at current levels. But if the delta between HSFO and the alternatives widens significantly, he said the payback could fall to six months.
Spread Narrowing As Scrubbers Installed?
One market relationship that wasn’t mentioned on the call, however, is that if scrubber growth soars, that will mean many more ships able to buy HSFO and spurn the lower sulfur blends. Given that trend, the spread would narrow and the economics of scrubber installation wouldn’t be as favorable as when it is wider. It’s the always-present market check on excess either way.
Scrubbing Helps in the long run?
Installation of the scrubbers can be done in drydock or in a more complicated series of steps while the ship is in service, both Humphreys and Confuorto said. The drydock option allows installation in a matter of days but takes the ship out of service. The in-service option can take two weeks but allows the ship to keep operating.
Mehrotra asked if there were any aspects of the IMO 2020 policy that had not received much attention. Confuorto noted an environmental benefit that comes with scrubbing – particulate removal. While IMO 2020 is targeted at sulfur removal, particulates – tiny bits of matter that are present in all emissions – can do far more damage to human health. Even if 0.5 percent sulfur fuel oil is burned, “it still has particulates going up the stack and that is dangerous if not more so than sulfur,” Confuorto said.
Scrubbing captures particulates as well as sulfur and discharges them into the ocean if the scrubber is the type of “loop” system that allows that. “The scrubber is putting the dust in the water,” Confuorto said, instead of in people’s lungs.
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Source: Freight waves
