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Friday, January 3, 2020 

Analysts at shipowner organisation BIMCO have highlighted the fact that for the time being, the VLSFO to MGO LS discount has vanished in Singapore, with price levels for VLSFO and MGO LS rising respectively by 30% and 24% throughout December.

BIMCO suggests that bunker suppliers are seemingly leveraging the IMO2020 regulation to their benefit. Very-Low Sulphur Fuel Oil (VLSFO) prices rose to US$710/tonne in Singapore on 2 January 2020, a price increase of 30% from 2 December 2019. With IMO2020 implemented on 1 January 2020, the shipping industry is instantly challenged. In the second half of 2019, the fuel oil price spread between low-sulphur fuel oils, such as Marine Gas Oil Low Sulphur (MGO LS) or VLSFO, and High Sulphur Fuel Oil (HSFO) widened significantly, mostly due to the price volatility of HSFO.

However, through December low-sulphur fuels started to increase significantly in price. Currently, the VLSFO – HSFO spread in Singapore is at US$340 per tonne, the third highest level since low-sulphur fuel became widely available. Similarly, the MGO LS – HSFO spread is at US$346/tonne, the highest level since 2014. Translating the VLSFO – HSFO price spread into shipping terms, a ship burning 20t/day of fuel will effectively double its daily fuel costs from US$7400/day to US$14,200/day when switching from HSFO to VLSFO. Such an uptick in fuel oil costs will surely have financial implications for many companies.

Although VLSFO is a relatively new product in the market - introduced primarily in response to IMO 2020, it is regarded as a viable alternative to MGO LS, as VLSFO has traditionally been sold at a price discount in the range of US$20-60/tonne in Singapore. However, for the time being, the VLSFO to MGO LS discount has vanished in Singapore with both bunker fuels currently sold at around US$700/tonne. With such a price convergence, the apparent advantage of VLSFO goes out the window.

As the industry moves away from HSFO, the suppliers can command a substantial price premium for the low-sulphur fuels. Low supplies of low-sulphur fuels could also affect the pricing mechanisms locally.

Whatever the underlying cause, the price levels for VLSFO and MGO LS have risen by extraordinary levels - low-sulphur fuels had been trading at relatively stable levels throughout 2019, as opposed to the more volatile HSFO.

Shipowners are most likely to be able to pass on the additional costs associated with IMO2020 compliance when underlying freight markets are favourable. With supply growth outpacing demand in all major shipping markets, this is not currently the case. The widening spread could have dire consequences for many shipowners, who must carry the additional costs themselves.

Owners who have invested in scrubbers seem to be the winners at the moment.

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