David Hughes (DH): In what ways is the global market changing? Søren Høll (SH): Eighteen months ago, the arrival of IMO 2020 was expected to be the biggest challenge shipowners, operators, and bunker suppliers would face that year. Some experts predicted that it was going to be as substantial as ships’ switch from coal to oil in the early 20th century. While there have been fewer issues than many expected, the global sulphur cap has nevertheless changed the way we bunker forever.
IMO 2020 has created an inherently more complex marine fuels landscape. Safety, compatibility, and regulatory compliance have become more interlinked than ever before, and finding the right fuel, at the right time, for the right vessel has become much more challenging. Price is still an important consideration, but there’s now more to consider to ensure you’re maximising the efficiency and utilisation of your ships.
Last year saw substantial bunker price volatility. This presented a textbook example of why cutting corners on hedging and procurement strategies doesn’t pay in the long run. In Rotterdam for example, VLSFO fell from roughly US$600 per tonne in January 2020 to $150 per tonne in May 2020. By May 2021, we had VLSFO with averages closer to $500 there. In these challenging situations, a counterpart with the knowledge, trust and global coverage to navigate through these periods that we’ll continue to endure is essential.
DH: What does that mean for the various players in the market?
SH: We saw that many companies were ‘saved by the bell’ in 2020, but we wouldn’t be surprised to see more consolidation in the industry as the dynamics many expected in early 2020 re-emerge this year.
The interlinked demands of credit and creditworthiness, as well as the higher cost of IMO 2020 compliant fuels, made it more difficult for smaller firms to keep doing the same level of business with their existing credit lines. When Covid-19 emerged, risks across the supply chain increased and some of those who didn’t have adequate risk management became insolvent.
The industry has seen a decline in capital availability for all but the strongest players. This is primarily the effect of large banks ABN AMRO and BNP Paribas pulling out of commodity trade finance altogether, which has created additional costs, liquidity and transaction complexities for shipowners, and bunkering companies, and is something that’s likely to continue this year.
Managing risk effectively will require many players in the bunker industry to change their business models significantly. Unless they have expert local and technical knowledge, financial strength, and global coverage they’re going to find it very difficult to thrive in this new era.
DH: What effects has Covid-19 had on bunkering?
SH: First and foremost, I’m enormously concerned about the seafarers who have become collateral damage of the pandemic. Mariners are the lifeblood of global commerce, and far too many of them are still stranded on vessels, and there haven’t been enough vaccinations.
This is a humanitarian issue, but exhausted sailors also increase the risk of accidents that could harm them or the environment. What we need is for national governments to work together to solve this crisis, and great work is already being done, such as the Seafarers’ International Relief Fund – a united appeal by the global shipping industry to deliver urgent support to seafarers and their families
in India. Beyond the impact on seafarers, demand in major ports – where we are focused – has been resilient so far, and we expect it to continue. For example, Singapore’s bunker sales fell below 4 million tonnes in May and June in 2020 but rebounded to over 4.1 million tonnes in July and August – which outperformed the volumes posted for the same months in 2019. Nevertheless, overall volumes are clearly down year-on-year, and some sectors, especially cruise, have been more affected than others.
As previously mentioned, it’s clear that many smaller companies weren’t in good health last year and this is due at least in part to Covid-19. Over the last three years in Singapore alone, there have been plenty of insolvencies, liquidations, and one-way trips to judicial management. This includes at least four firms that were once frequently in the Lion City’s annual top 20 bunker suppliers by volume. However, these issues extend well beyond Singapore, and it is a credit to the MPA’s enforcement that the overall quality of bunkering in the region is improving
year on year.
We also cannot forget the challenges on the supply side, notably the disagreements within OPEC+ over how much crude oil to produce, which led to a huge surplus just as demand started to fall. Some agreements have been made and OPEC has decided to move forward with a planned gradual crude production increase. It remains to be seen how much impact the recent decarbonisation and sustainability developments at majors like Chevron, Exxon, and Shell affect long term crude supply.
In addition to these challenges, the reality is that counterparty risk assessment has become more important than ever. If you’re not doing your due diligence to ensure that you’re working with a credible supplier, you’re putting your company at tremendous risk in a market as volatile as this one.
DH: What are the short to medium-term prospects for the various sectors of the supply chain?
SH: It continues to be true that the shipping industry is the glue holding the globalised economy together. Its fundamental importance is not going to change any time soon, but the value drivers may well do. Most vessel sectors have had excess capacity in recent years. However, thanks to a confluence of circumstances, it now seems as though the majority of shipping sectors can look forward with cautious optimism for the next 12 months – and perhaps even further.
Decarbonisation is likely to be the biggest shift for our industry in the medium term. Indeed the changes we face today as we sail towards the IMO’s 2030 and 2050 targets are likely to substantially change the supply chain. There are multiple pathways to achieving these ambitions, and there will be a mix of different solutions and fuels. But the big question remains around infrastructure, and what type of alternative fuel is actually possible to facilitate and make available in certain regions. We’re working with several partners to ensure that our counterparts are always able to find the right fuels in the right locations for their ships. This is reinforced by our commitment to decarbonisation and creating a more sustainable future for our industry, and the world. We recently completed our first carbon offset transaction with a US-based client, and we’re actively exploring other pathways to enhance the sustainability of our client’s marine fuel procurement.
DH: In the longer term, how do you see the market changing as shipping moves towards zero carbon?
SH: For us, IMO 2020 was just the beginning, and we expect to see a transformation in the shipping industry in the coming years. The dual impact of IMO 2020 and Covid-19 have changed the marine fuel ecosystem. There will be no shortage of challenges in our future, but counterparty risks shouldn’t be one of them, and in an evolving era of change it is incumbent upon every player to choose who it partners with wisely.
The shift towards future fuels and alternative sources is growing, and we’re fully committed to providing shipping with the energy it needs to run its fleets sustainably. As a marine fuels partner, we have a responsibility to guide our customers through these transitionary periods, and we will provide the best solutions for their fleet through our trusted and knowledgeable expertise. We’re exploring the development of different fuels, and fully expect our bunker sales mix to be very different in 2030 and 2050, including biofuels and perhaps LNG. We already have partnerships with some clients where we also look into how we can innovate and add value to the targets in the value chain, for 2030 and 2050.
DH: What are the implications for suppliers and shipowners?
SH: As the world returns to normal, or the new normal, we’re expecting shipowners and operators to face significantly more complexity. It’s clear that compliance, compatibility, and safety have become more interlinked than ever before, so owners and operators need to be confident that their partners can deliver beyond the basic price of the product, and provide value through their specialist knowledge and expertise.
Rather than having one pathway to meet decarbonisation, there will be an array of different fuels for shipowners to choose from, and this will require financial and technical guidance from their counterparts. We expect that the marine fuels mix will soon be very different, and we’re open-minded about expanding our offering beyond traditional fuels. I also believe that they’ll call for more transparency, so having partnership-based relationships built on trust will unlock greater opportunities for all parties involved.
As a prime mover and agile partner, we’re well positioned at KPI OceanConnect to support our business partners to thrive in this new marketplace by providing the best solutions in response to the increasingly diverse and complex nature of the market, and meeting the new demands of our business partners. I’m confident that we have the vision, experience and flexibility to ensure that we can continue to meet our customers’ more complex needs, and provide them with the right counsel to empower them in navigating the industry’s transformation.
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