About the strong market and consequences of IMO 2020

The tanker markets continue to be strong and are following the trend we have predicted and talked about for so long. The main drivers include structural factors such as a general increase in demand for both oil and tanker transport and low net fleet growth. Seasonal effects and consequences of the introduction of IMO 2020 are also contributors.

Looking ahead, the situation continues to be positive. Both the order books and order intake for new tankers are low  – and demand is expected to remain good. Overall, this means that we expect a continuing strong market in 2020 and again in 2021.

Higher bunker costs – but no direct effect on earnings

The IMO’s new regulations came into force on 1 January 2020, resulting in a reduction in the maximum permissible content of sulphur in fuel (bunkers) from 3.5% to 0.5%. The new rules mean that the world’s 60,000 or so merchant ships must either switch to low-sulphur and more expensive fuel – or continue to use high-sulphur fuel and instead install scrubbers that clean the exhaust gases.

Vessels with scrubbers have lower fuel costs, but on the other hand they have to make an investment of about $3-5 million depending on vessel size.

The price differential between low and high sulphur content is currently in the order of $250-300/mt, depending on the region of the world. For Suezmax vessels with scrubbers, the difference in TCE (Time Charter Equivalent, i.e., voyage result per day) is approximately $8-10,000/day, while for an MR vessel, the difference is about $5-7,000/day.

The proportion of vessels that have or will have scrubbers varies between different vessel segments. In the VLCC segment, the proportion will be about 35 percent. In the Suezmax segment, it is about 25 percent, while only about 10 percent of MR/LR1 product tankers will have scrubbers. Installations have been in progress for some time and are not expected to be completed until late spring.

As a majority of vessels will not have scrubbers, these vessels will also determine the market price for freight in the future. This is particularly evident in the MR segment where relatively few vessels will be equipped with scrubbers.

More complexity in market data analysis

We often talk about and compare ourselves with average market earnings. However, it has previously been the case that the difference in bunker consumption meant that vessel earnings –even within the same segment – could vary quite sharply. The possibility of installing scrubbers has now increased the earnings variation further. As a direct consequence, some market reports have now started to break down the reporting into both vessel age and type of bunker (as a result of scrubber/non-scrubber). Others report a weighted average. It is therefore increasingly important for the reader to consider the type of vessel in question.

For our own part, we will continue to compare ourselves with Clarksons world market index for MR vessels (clean) built before 2010 and without scrubbers, as this is closest to our situation.

We will obviously continue to provide updates about the market situation in general, but also about the complexity that an increased number of bunker options brings.

Gothenburg, January, 2020,
Kim Ullman