In one year, a major change is going to turn the maritime shipping industry on its head.
The fuel that drives global trade is undergoing a radical shift.
The United Nations is forcing the industry’s hands.
Tankers, cargo ships and even cruise liners are going to have to adopt a new type of fuel — or pay the price.
Most ships today run on fuel oil. It is nothing like the gas or diesel you put in your car.
It is a heavy sludge made up of what’s left from a barrel of oil after companies turn it into other fuels and products.
Fuel oil is high in sulfur. Under current rules, fuel oil can contain up to 3.5% sulfur.
The maritime industry burns about 4% of all oil.
With the sulfur-rich fuel, that also makes it one of the heaviest polluters.
The air quality on a tanker in the middle of the ocean can be worse than that of a populated city.
The International Maritime Organization (IMO) is the U.N.’s arm for maritime regulations.
In 2008, it started plans to cut down on sulfur pollution from the industry.
Those plans solidified in 2016 to set the new benchmark for a max 0.5% sulfur in fuels starting on January 1, 2020.
We are already seeing effects of the new law.
Tightening Diesel Supply
Diesel car and truck owners are already feeling pains from the new IMO regulations.
While it’s normal for diesel to fetch a premium at the pump, the spread between gas and diesel has grown.
At my own local pump, diesel held strong at $3 per gallon while gas fell below $2.
That’s over a 50% premium on diesel.
Nationwide, the spread has doubled from $0.38 in July to $0.76 in December.
That’s because the new maritime fuel, known as very low sulfur fuel oil (VLSFO), takes up refining capacity that would go to diesel or jet fuel.
As the premium on diesel grows, it will tug at the price of oil.
Faced With Few Choices
While refiners race to adjust for the spike in VLSFO, ship owners are also faced with tough decisions.
A ship owner has a few choices:
- Switch to the costlier VLSFO.
- Install an expensive sulfur scrubber.
- Switch to alternate fuels.
VLSFO will be pricier. According to global chemicals company Wood Mackenzie, fuel prices could grow by 25%.
A scrubber means a large upfront cost to keep using the cheaper fuel oil. Scrubbers range from $3 million to $5 million. New vessels range from $10 million to over $100 million depending on capacity and use.
Longer term, new ship orders may take advantage of alternate fuels. Liquefied natural gas (LNG) is one such option. The demand for natural gas is causing a rise in ships that can carry LNG. In the coming years, many are likely to take advantage of this cheap fuel source.
By 2020, only 2% of vessels are forecasted to install scrubbers.
LNG-powered ships will only stand at about 1%.
So, it looks like most ships will need to switch to VLSFO.
Refiners that can adapt to the new demand will benefit from cleaner marine fuel.
Consider adding the VanEck Vectors Oil Refiners ETF (NYSE: CRAK) to your portfolio.
This ETF tracks a basket of U.S. refiners.
Internal Analyst, Banyan Hill Publishing