Yesterday evening found me, online of course, teaching one of my favourite lessons to my Institute of Chartered Shipbrokers students: the Tanker Market section of Economics Of Sea Transport. I find it fascinating and rewarding, academically and practically, because you can bring all of modern life to it. Contrary to popular opinion, tankers are not quite the stranded assets that activist shareholders and other pressure groups would have us believe. When the freight market is influenced by a complex number of sometimes conflicting economic drivers, the demand for ships is derived from the demand of everything from air travel to motorway building, and the supply of tonnage is often on the knife-edge of optimum fleet utilisation, globally and locally, all overcast by the long shadow of geopolitical affairs, well who could fail to be entranced?
I try to pass on some of this nerdish fascination to my students, and whilst the zoom sessions are sometimes less than ideal, I manage to keep most of them until the end. Last night one of my students commented that she had read a report that predicted, sorry forecasted, that tanker market earnings would increase in the second quarter of 2021. Of course, this was like a red rag to a bull to cynical me: aside from the fact that brokers like to forecast positive news as a matter of principal, and this could just spark buying interest for the new year when prices are expected to be lower, if I had told you this time last year that I would be teaching online because we were in the midst of a global pandemic you would have thought I was a fantasist at best, and crazy at worse. But if I had also told you then I would be still be writing about scrubbers at the end of 2020 you would perhaps be even more surprised.
But indeed here I am, writing about scrubbers. The spread between High Sulphur Fuel Oil (HFSO) and Very Low Sulphur Fuel Oil (VLSFO), rather unimaginatively and, lets be honest, cheesily named “Hi5”, has been growing in recent weeks, after stubbornly sticking to the US% 50-65 range for most of the year. According to Splash 24/7, Christian Plum (a very Christmassy name) of Denmark’s BunkerMetric “The spread has already crossed $100 per ton at Houston, where the tendency is strongest, and the other bunker hubs seem on track to follow”. BunkerMetric further notes that low sulphur fuel oil prices are lately correlating more closely to gasoil prices rather than heavy sulphur fuel oil.
I have some friends in the bunker world, and they tell me the picture is a bit complicated. Let me try and summarise:
- The spread has been widening quite a lot in Rotterdam, Fujairah and Singapore, and less so in Gibraltar mainly because Brent has gained and lifted prices for both products
- As VLSFO is more closely tied to gasoil, and because middle distillate demand is recovering in Asia, VLSFO has seen a lift in prices
- HSFO demand has also been growing, though, particularly in Singapore as more scrubber-fitted ships come out of drydocking and need fuel
- But growth in Singapore HSFO demand stalled in November putting a ceiling on HSFO prices
- The US has also been pulling less HSFO from Russia in recent months, after complex US refineries bought big volumes through the summer to feed their coking units. That demand propped up global HSFO prices earlier this year
- As the global economy recovers from COVID, refineries will run harder to produce the higher yielding products (ultimately transport fuels) and therefore more HSFO (in effect a waste product) will be produced pressuring the price downwards and therefore further widening the spread
So here is a classic complex oil story. The spread has grown because the overall demand for oil is growing, and because the demand is greater for middle distillate products – cleaner fuel oil, marine gas oil (MGO), kerosene, diesel for trucks and cars – the price of the cleaner VLFSO (which commonly blends in sulphur free MGO to get the sulphur content down) is rising. The spread was not noticeably greater as the scrubber-fitted ships coming back into service kept demand high, but this demand dried up keeping a cap on HSFO prices.
The story for most shipowners therefore is not necessarily just one of an increasing Hi5, but higher bunker prices for the majority of the fleet. But those owners who fitted scrubbers to their vessels are now starting to point fingers at those – including me it must be said – that questioned the wisdom of adding a small refinery on the back of their ships. But they cannot start crying out “I told you so” quite yet. As Splash 24/7 points out:
Ahead of the sulphur cap coming into force a price differential of $150 per ton was seen as the absolute outlier in terms of timely payback times for those who had invested in scrubbers. Given the low Hi-5 numbers seen throughout 2020, analysts contacted by Splash suggest this number has crept up to $200 for 2021 and 2022.
So even though the Hi5 is steaming up the charts, it is still a long way off returning the investment on the 4.1% of the fleet who have had scrubbers installed. And indeed, there are still strong headwinds for these vessels as the bans on open-loop scrubbers in many parts of the world remain in place and show no sign of disappearing.
Another interesting point, for me at least, is that we are talking about comparative numbers, the spread between prices that are rising for 95% of the fleet because overall demand for fuel is rising too. This is because overall demand for fuel is recovering (good for the global economy, and for tankers) and therefore points towards better times for shipping as a whole. You could infer from this that ships are speeding up too, and therefore fleet utilisation is rising… but perhaps this too much of a stretch. But it could also be that the report that my student will be proven right too.
But then we come back to what I think any lesson in maritime economics must always remember. The demand for shipping is derived from the demand of the cargo itself, and in tanker shipping this is not as easy as following IEA forecasts, however tempting that may be. The IEA forecasts are not written in stone, and tonne-mile demand involves any number of different factors, from geopolitical developments to bad weather and a lot more besides. We are always looking for stories to tell each other in shipping to make some narrative sense of the complex and confounding world around us, to guide us and our clients to profitable investment and employment decisions. But then something unexpected, out of the normal range of apparent risks (and even then not technically a black swan event), comes along to make us realise how little control, and how little understanding we have of our own little corner of the universe. This as it should be, because if it was not, then the market – and loss, profit, commissions, claims, and all the other things that drive our world – would not exist at all.
In our desire to accurately forecast future market trends, we should remember that we derive our very livelihoods from the unpredictably of the future. We should therefore take some comfort in the unknown, however counterintuitive that may feel.