- Scrubber savings still there even with the huge fuel price gap
- It won’t disappear and up for a long haul
- The question of loss arises only when the fuel spread goes below $50/mt
- Despite depending on the spread, the scrubbers act against volatility and risks
- The reopening of chinese yards has shown that scrubbers interest is still there
- It is just a temporary COVID19 slowdown which is not restricted to scrubbers alone
Recently, Platts spoke to the Wartsila, Scrubber Director, Sigurd Jenssen who highlighted that the interest in scrubbers will always remain resilient, despite the impact of low oil prices on investment decisions with customers questioning the financial case when the spread between VLSFO and HSFO is below $50/mt, says an article published in Platts.
Let us take a look into that interview and understand the key points from Wartsila perspective.
Fuel Price Gap A Concern for Scrubbers?
- Shipowners who have opted for scrubber installations to comply with the International Maritime Organization’s global low sulfur mandate have been poring over their calculations after the price of very low sulfur fuel oil collapsed on coronavirus-led demand weakness.
- The price gap between VLSFO — which meets IMO’s 0.5% sulfur cap — and HSFO — which needs a scrubber to remove the sulfur — has narrowed by 80% since the start of the year to all-time lows.
- In Northwest Europe, the premium of VLSFO delivered bunker fuel at Rotterdam over HSFO narrowed to a record $43/mt last week, S&P Global Platts data showed.
- The spread has since widened. Platts assessed it at $71/mt Wednesday.
Jenssen said that typically the spread between VLSFO and HSFO depended on the oil price. “A higher oil price means a higher spread. From customers we hear in their calculations, the spread somewhere between $50-$100 /mt provides an interesting investment case for them, so as long as it is in that range scrubbers are still attractive. If it goes below $50/mt then it is a bigger question,” he said.
Nevertheless, energy equipment maker Wärtsilä believes scrubbers will play an important role. “Longer term, the market will normalize and the financial logic doesn’t disappear. The savings are still there,” Jenssen added.
Scrubber Acting Against Volatility?
He explained that while the financial case for ship engine cleaning equipment is driven by the spread, scrubbers also act as a hedge against volatility and risk. He also pointed out that while the big ports may be seeing a low spread that isn’t necessarily the situation across the board.
“You might see a low spread at the big hubs like Rotterdam or Singapore, but that doesn’t help you a whole lot if you are in one of the smaller hubs..and there you see a lot more variation in the spreads,” Jenssen noted.
Slow Down Not Specific To Scrubbers
While Jenssen stressed the double whammy of weak demand and low oil prices was having an impact, he noted that interest was still there. “For sure things have slowed down. But that isn’t specific to scrubbers, that is everything. We still see a lot of projects and carrying on business. There is still activity in the market.”
Indeed, China was even showing a revival as it limped back to economic life after the lockdown to contain the virus. “Since China has opened up again we see a lot of progress on the delays in the shipyards. Our impression is they are picking up pace quite quickly on the scrubber retrofits,” Jenssen said.
- Delays in installing scrubbers at dockyards have been a problem with shipowners scrambling to fit the systems ahead of the January 1, 2020 deadline and have yet to clear.
- In addition, the ongoing impact of the coronavirus pandemic has added further complications to the mix.
- Platts Analytics has calculated more than 2,500 ships fitted with scrubber systems as of the end of February and expects this to rise to 3,500 ships by the year-end, with more upside potential in 2021.
- Many analysts have also talked up the merits of scrubbers.
“Did video kill the radio star? Not at all and the same goes for scrubbers,” said international shipping body BIMCO analyst Peter Sand, stressing the long-term payback of scrubbers.
- Others have been less convinced. “We believe that a VLCC being retrofitted with a scrubber will now take over four years to pay off the investment if fuel prices remain at today’s levels, a significant gamble for the owner,” tanker market intelligence company Alpha Tanker said in a research note.
- “Installations due to be carried out in Chinese yards were already being delayed in the wake of COVID-19 and now following stellar returns for tankers, some owners are reportedly delaying or even, where possible, cancelling installations,” it said.
- The research also suggested that owners of bulkers or liners struggling amid the global downturn are also cancelling scrubbers as they strive to cut costs.
- “We fear that this is just the tip of the iceberg and as the global recession intensifies during the second quarter, this drip of cancellations could turn into a flood,” Alpha Tanker said.
Scrubbers Likely To Stay in Power?
Jenssen also believes that scrubbers will have staying power. “I don’t see any other option in the foreseeable future. If you build a vessel today it will have either a diesel, bunker fuel or LNG solution and these ships will sail for another 20-30 years so demand will be there. The inertia in the supply chain, the logistics part, means that we’re not going to completely get rid of petroleum-based fuels for quite a long time. Of course there will be a changeover, but the transition will be a very long journey.”
Newbuilds Will Always Eye for Scrubbers?
While he was circumspect about the longevity of installing scrubbers to existing ships, he saw a lot of life in new builds. “That retrofit boom will go away. First of all there is a limited number of ships. It’s difficult at least emotionally to put a scrubber on a 20-year old ship. It might make financial sense, but investing that kind of money into a 15-20 year old vessel may only be worth only $7 million-$8 million altogether, you probably won’t do that and as time passes the fleet gets older.” Jenssen added, however, “on the new build side we believe scrubbers will remain an option at least for the short and medium term.”
Scrubber Demand in Asia
Wärtsilä sees Asia as a big demand hub for the kit.
“In Korea and Japan we see the majority of vessels there being fitted with scrubbers. Well over 50% choose scrubbers as a solution,” Jenssen said.
European Market Varied Interest
In Europe, uptake of scrubber retrofits has been more varied among market participants, with COVID-19 adding to the volatile picture post-IMO 2020 and raising the stakes even higher on the scrubber bet.
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