Cheaper compliant fuel oil stalks gasoil’s lead in IMO 2020 switch

very-low sulfur fuel oil (VLSFO) has emerged as a dark horse to challenge MGO as a replacement for high-sulfur fuel oil. (Reuters)
Updated 06 September 2019

Cheaper compliant fuel oil stalks gasoil’s lead in IMO 2020 switch

  • IMO 2020 to boost gasoil demand by about 1.4-2 mln bpd — analysts
  • New shipping rules cap sulfur content in fuels from next year

SINGAPORE: When new global rules limiting the amount of sulfur in shipping fuels were announced, marine gasoil (MGO), a type of diesel fuel used on ships, was declared the early winner since most types readily met the new 0.5% limit on sulfur content.
But with only about 100 days before the International Maritime Organization’s (IMO) rules start, analysts and traders agree that the scale of the MGO demand swing will not be as great as expected.
Instead, very-low sulfur fuel oil (VLSFO) has emerged as a dark horse to challenge MGO as a replacement for high-sulfur fuel oil, with a 3.5% sulfur limit, once the switch begins in 2020.
VLSFO for sale in October in Singapore, the world’s biggest ship fueling port, is currently indicated at $465.25 a ton, according to data from brokers Starfuels. That compares to MGO at $556 a ton in the city-state, according to ClearLynx.
With the supply of VLSFO set to jump, shipowners are expected to lean toward the lower cost option. At stake is which type of fuel will replace the 3.6 million barrels per day (bpd) of HSFO, the shipping industry currently consumes.
“In Europe and Singapore we’ve been successfully producing batches of VLSFO and we’ve been working hard with our customers to test those and try them. The feedback has been positive,” Sharon Weintraub, the Chief Executive Officer for Supply and Trading, Eastern Hemisphere, at BP Plc told Reuters.
“We expect most people will look to migrate to VLSFO. However, there will be a proportion of more conservative customers who are looking to use MGO.”
The global shipping industry was initially skeptical about the quality of VLSFO, but as 2020 approaches market participants agree there is growing confidence in VLSFO.
“The concern about quality is not as great as it used to be. It’s being tested left, right and center. Most of the fuels available are stable, fit for use, and in general of good quality,” Lars Malmbratt, General Manager for Bunker Procurement at Swedish shipping company Stena Bulk said on Tuesday on the sidelines of an industry conference in Singapore.
MGO’s established accessibility at ports bolstered expectations for its dominance while there were doubts about how well supplied low sulfur fuel oil variants could be.
“The closer we get to 2020, the more it seems there will be more low sulfur fuel oil than people previously thought,” said Matt Stanley, an oil broker at StarFuels in Dubai.
Consultancy Energy Aspects said last month that the global refining industry is likely to produce more than 1 million bpd of VLSFO from now until the second quarter of 2020.
“If all this LSFO can be placed with shipping companies, which is not yet guaranteed given the lack of experience ship owners have with this fuel, diesel will be the loser,” Energy Aspects analysts said in a note last week.
Even so, incremental gasoil demand growth because of the IMO 2020 switch will be between 1.4 million bpd, according to consultants FGE, and 2 million bpd, according to Energy Aspects, as some shippers prefer to stick with proven grades.
“There are still a small handful of ship owners who are not quite convinced about the quality of the VLSFO, and they would insist ... to burn low sulfur gasoil, which is proven, has an ISO standard and is stable,” said Justin Tan, bunker procurement manager at The China Navigation Co, Singapore.
Still, he added, “the industry is pressured... to find the most cost efficient way of operating a vessel.”
The slowing economy is also working against MGO.
“The (gasoil) market is facing less of a squeeze than we had previously feared,” said Emma Richards, Senior Oil & Gas Analyst at Fitch Solutions.
“The bigger issue... is the slowdown in global trade growth we’re seeing, which will dampen demand for marine fuels as a whole, and the weakening of industrial demand for diesel, as global economic activity cools off.”
Even so, the extent of the IMO 2020 switch will generate a notable draw on global fuel supplies.
“The market has underestimated the difficulty of supplying the new 0.5% sulfur gasoil material given the scale involved,” said Sri Paravaikkarasu, a director at FGE.

Blame game as wheels come off India’s auto sector

Updated 16 September 2019

Blame game as wheels come off India’s auto sector

NEW DELHI: When India’s Finance Minister Nirmala Sitharaman claimed that a preference by millennials for ride-hailing apps was contributing to a painful slump in car sales, it sparked an online backlash from furious youngsters.

They started a campaign using ironic hashtags such as #BoycottMillennials and #SayItLikeNirmalaTai last week to push back against older generations blaming them for today’s problems in society.

While data shows firms such as Uber and Ola are popular with younger consumers more comfortable with shared mobility and digital trends, analysts say the auto industry’s problems run deeper than that — and it is facing more serious bumps in the road.

With a population of 1.3 billion people, India is the world’s fourth-largest car market and one where owning a vehicle is as much a status symbol as a means of transport.

But the country’s once-booming auto sector — seen as an important barometer of overall economic health — is in the slow lane, with sales slumping for the 10th-straight month in August.

“The minimum (priced) car that you can get nowadays starts from six to seven lakhs ($8,500 — $9,800),” university student Somya Saluja told AFP.

“So it’s much easier to pool-in rather than to buy a new car.”

Even India’s richest banker, Uday Kotak, recently said that his son was more comfortable using ride-sharing apps than owning a car.

Uber and Ola reportedly facilitate some 3.65 million daily rides.

Still, Avanteum Advisers managing partner VG Ramakrishnan told AFP the key reason for the drop in car purchases was economic.

“I think the slowdown is primarily because consumer confidence is low and income growth has really been impacted in the last couple of years,” he told AFP.

India’s economic growth slowed for the fifth-straight quarter in April-June to reach its weakest pace in five years.

Banks are also more reluctant to lend owing to a liquidity crunch caused by the near-collapse a year ago of IL&FS, one of India’s biggest shadow banks — finance houses responsible for significant consumer lending.

There are also extra production costs caused by new rules requiring cars to be compliant with emissions and safety standards, while a 28 percent goods and services tax (GST) introduced in 2017 has dampened demand, analysts said.

“Cars are increasingly becoming unaffordable now because of so many taxes,” Karvy Stock Broking auto analyst Mahesh Bendre told AFP.

“To put things in perspective, if you buy a car in India, at least 40-45 percent of costs go to the government in terms of taxes and registration charges and so on.”

A year ago, India displaced Germany to become the world’s fourth biggest car market, having clocked up annual sales growth above seven percent for several years.

But the promising growth ride is screeching to a halt, with passenger car sales tumbling this year, including a 41 percent drop last month — the worst since records began more than 20 years ago.

Aside from passenger cars, sales of commercial vehicles, motorcycles and scooters have also been hammered.

With the industry — a major employer in India — contributing more than seven percent to total GDP and almost half of manufacturing GDP, the potential fallout from an extended slowdown is sending shockwaves through the economy.

Manufacturers are reducing production and cutting jobs, which is also affecting related industries such as auto component manufacturing and at dealerships, totaling about seven percent of India’s total workforce, Bendre said.