LSFO

Dumping that Sulphur: CRISIL predicts LSFO more viable option for shippers

Post By : News Desk
Post Date : February 29, 2020
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In the backdrop of the International Maritime Organization’s low sulphur mandate, in effect from this year, it has been found that Low Sulphur Fuel Oil (LSFO) has emerged as a viable alternative for shippers in the long run. As a bunker fuel, there has been a growing shift towards LSFO among Indian shippers. We explore more in the story, along with existing supply chain creases in the system that need to be ironed.

The International Maritime Organization (IMO) has mandated the use of low-sulphur fuel oil (LSFO; 0.5% sulphur) by ships replacing high-sulphur fuel oil (HSFO; 3.5% sulphur), with effect from January 1, 2020.

Consequently, this has left ship owners with two options, in order to be compliant: Either use LSFO, or continue to burn HSFO by equipping ships with exhaust gas cleaning systems called scrubbers.

So far, only 5-10% of the global fleet (by number of vessels) is estimated to have installed scrubbers, and by the end of 2020, this is expected to improve to only 10-15%. In other words, shippers prefer a switch to LSFO.

Low adoption of scrubbers

There is a general disregard towards the adoption of scrubbers, and this low preference is because of two factors: a ban on open-loop scrubbers, that are believed to transfer pollution from air to water at ports; and, two: the ease of transition to LSFO for refiners, which could lead to pressing concerns about availability of HSFO, especially at small ports.

Apart from this, the cost of installing a scrubber stands very high at USD 2.5-4.5 million (INR 18-32 crore, which is 5-10% of the typical capital cost for a Suezmax or Aframax vessel).

With these factors in mind, a cost analysis of vessels with and without scrubbers over a 15-year lifecycle indicates that it is beneficial for a ship to run on LSFO even if the price differential between LSFO and HSFO remains at the current level of $300 per mt. And as the price differential narrows, the economic benefit for players operating on LSFO increases, compared with players using HSFO with scrubbers.

In the interim, however, ships moving to LSFO may see costs shoot up, impacting fiscal 2021 margins at the EBITDA(earnings before interest, tax, depreciation and amortisation) level. In fiscal 2021, operating margins of the players operating on LSFO are expected to dip by 400-500 bps due to higher bunker fuel prices. On the other hand, for those players who have installed scrubbers, margins are expected to dip by 100-200 bps as they will still need to operate ships on LSFO on the scrubber banned ports and also due to increase in maintenance cost on account of scrubber. In case ship owners chose to use the high-priced diesel oil, it could impact their margins even further.

Scarcity of LSFO at the east coast and its impact on transhipment traffic

Indian ship owners are facing initial hiccups linked to supply and availability of LSFO – especially on the east coast – even though the surge in demand was anticipated. Interactions with market participants indicate India’s current LSFO demand is 1-1.5 MMTPA (assuming 5-10% of

Indian ships have installed scrubbers), which is only 1-2% of global bunker-fuel sales. About 70% of marine fuel sales in India are to Indian flagships undertaking domestic coastal voyage, while international ships account for the remaining 30%. Even though Indian refineries are well-positioned to move to LSFO, delays in commencement of production by some refiners and shutdowns for upgradation to BS-VI norms have led to supply constraints. Moreover, LSFO stocks depleted quickly due to panic buying by ship owners ahead of the implementation of the new norm. On the west coast, refineries were able to fulfil the initial demand for low-sulphur bunker fuel. However, supply constraints on the east coast have led to disturbances in coastal traffic.

The shortage of LSFO has also affected transhipment traffic, which has switched to ports such as Singapore and Colombo, where bunker fuels are available. And though the bunkering requirement of coastal ships has been given priority, they are also facing headwinds due to the shortfall.

Given the non-availability of LSFO on the east coast, ship owners are filling up the fuel oil non-availability report and are stocking small quantities of HSFO or diesel oil that are enough to reach the nearest port with LSFO availability. This is leading to route inefficiencies and voyage delays.

That said, the impact on the overall transhipment traffic in India is relatively low, as eastern ports such as Kolkata, Chennai and Ennore account for only 30% of India’s transhipment traffic – which is anyway only 10% of the total traffic.

CRISIL report states that interactions with stakeholders, such as regulators, refiners and bunker fuel traders, indicate that this situation is temporary and is expected to stabilise over the next 2-3 months, with almost all refiners ramping up LSFO production.

In India, State-owned companies like Indian Oil Corp (IOC) have revealed that it has commenced delivery of fuel for ships that is compliant with International Maritime Organisation’s (IMO) low sulphur mandate. So far as IOC  is concerned, the company said it commenced deliveries of IMO-2020-compliant Low Sulphur Furnace Oil (LSFO) with 0.5 per cent sulphur as marine fuel at Indian ports.

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