The dry bulk sector is counting the cost of running many new ships on high sulfur fuel oil, with almost half of its new dry bulk fleet delivered in 2020 to be installed with exhaust gas cleaning systems, or scrubbers, fitted, analysts have said.
BIMCO said on the organization's website Dec. 3. that 47% of newbuild bulkers were fitted with the equipment, with fittings concentrated on larger vessels. Most scrubber-fitted bulkers were delivered in the Panamax sub-sector, in this group 81 units out of 150 had scrubbers, equivalent to a 54% share, the BIMCO analysts said.
This comes against the backdrop of diminishing supply of 3.5% sulfur fuel oil, the fuel that scrubber-fitted vessels run on, which is keeping prices of HSFO well supported and the return on scrubber investments low.
The fallout from costly scrubber investments is highlighted by dry freight company Scorpio Bulkers which is exiting from the market following its unsuccessful scrubber gamble, with more than half its vessels fitted with them.
Supply of 3.5% sulfur fuel oil is likely to become increasingly tight on expected continued production curbs on OPEC+'s predominately medium sour crudes, which are a key feedstock for producing it, and as more Libyan crude, which is light and yields less 3.5% sulfur fuel oil, comes onto the market, Global Director for S&P Global Analytics, Chris Midgely, said Nov. 26 at the S&P Global Platts Mediterranean Bunker Fuel and Shipping virtual conference.
Additionally, through 2020 Russian refineries have followed the global trend of cutting run rates and this has still further decreased availability of 3.5% sulfur fuel oil. Lower crude prices have caused 3.5% sulfur fuel oil cracks to narrow, and Russian netbacks to turn negative, which has further discouraged Russian producers from manufacturing the fuel and further tightened supply, Midgley said.
Rising scrubber numbers
Growing numbers of installations of scrubbers are contributing to 3.5% sulfur fuel oil demand.
Platts Analytics expects there to be about 3,700 units installed by the end of 2020, of which at least 1,300 will have been installed over the course of 2020.
In December 2021 scrubbers are likely to account for over 1 million b/d of 3.5% sulfur fuel oil, according to Platts Analytics.
Scrubbers are one way to meet the International Maritime Organization's 0.5% sulfur cap on emissions from ships' engines, that came into effect on Jan. 1, 2020. Ships without scrubbers must buy more expensive 0.5% sulfur fuel oil, although with limited output and firm demand for 3.5% sulfur fuel oil the spread between the two fuel oils, the hi-5, has shrunk and extended the payback period for scrubber units.
Through 2020 dry dock bookings have become more attractive because in the face of low freight rates for some segments, the prospect of taking your ship out of work for dry dock has looked less expensive, Midgley said.
The rate of scrubber installations will decrease and there may be just another 600 added in 2021 because of the shrinking hi-5 spread.
The hi-5 spread is taken as a measure of profitability for scrubbers.
S&P Global Platts assessed the hi-5 for delivered bunker volumes at Rotterdam at $66/mt Dec. 3, compared with $309/mt on Jan. 1 directly after the IMO's sulfur cap came into force. At around $300/mt market sources estimated the payback time for a scrubber was one to two years.
At current levels, with the hi-5 less than $100/mt, the payback period for a scrubber may be four to five years on an Aframax or six years on a VLCC, Midgely said.
Scrubbers have shown signs of popularity in the dry bulk sector, although this move is now being questioned.
