• Demand for low sulphur marine fuels will rise in the coming months.
  • A shortfall in low sulphur fuel supply could lead to higher regional physical values for sugar, through higher freight costs.
  • Traders are building low sulphur fuel stocks to try to cover supply risk.

What’s Happening To Marine Fuels?  

  • On the 1st January 2020, the amount of sulphur allowed in marine fuels will fall from 3.5% to 0.5%.

  • This change was agreed by the International Marine Organisation (IMO) in an attempt to reduce greenhouse gas emission from the shipping industry.
  • Ship owners can comply in two ways:
  1. They can fit exhaust scrubbers and continue to use high-sulphur marine fuels.
  2. They can use low sulphur marine fuels.
  • Modifying vessels to fit scrubbers is expensive – typically $4m for a bulk cargo ship.
  • It’s easiest to fit scrubbers to new vessels, and payoff for the investment could be as long as 8 years, depending on the spread of high sulphur and low sulphur fuel prices in the future.
  • We therefore expect that most ship owners will comply by using low sulphur fuels.

Will There Be Enough Fuel To Go Around?  

  • We expect a sharp increase in demand for low sulphur marine fuels towards the end of 2019.
  • In order to increase supply, refiners around the world need to flex their output away from heavy fuel oils towards middle distillates, and/or change their crude slate towards lower sulphur blends.

  • We are already seeing signs of increased storage of low sulphur fuels to avoid the risk of localised stock-outs.
  • At Singapore (the world’s largest bunker port), lease rates for tanks have risen by almost 20% in 6 months and at least 14 oil tankers are being used as floating storage.
  • Sales of low sulphur marine fuels in Singapore also hit a record volume in June.

How Will The Rules Be Enforced?  

  • The IMO has no enforcement capability.
  • Once rules are decided it leaves the process of compliance and enforcement to member states.
  • This means there is the possibility of gaps emerging in how the rules are applied from 2020.
  • Already Indonesia has said the low-sulphur rules won’t apply to its domestic fleet operating in its territorial waters, because it’s too expensive to comply.
  • This could set a worrying precedent.

  • India has also grumbled that it has to comply with the new rules despite not feeling adequately included in the decision-making process.
  • Some member states (such as South Africa) are also unlikely to have relevant laws in place by the start of 2020.
  • Finally, there’s the risk that rules are not enforced rigorously, or that penalties for non-compliance are so low as to be meaningless.
  • We will continue to monitor all aspects of the transition to low sulphur marine fuels.

What’s The Impact On Sugar?  

  • In the event of regional supply disruption for low sulphur marine fuels, this could affect the competitiveness of sugar around the world.
  • For example, Thai raw sugar today is up to $37/mt cheaper into East Asian homes than Brazilian raw sugar.
  • But if East Asian freight rates climb around the New Year due to low bunker availability, this edge might disappear.