2006 saw bunker fuel prices reach an unprecedented high, hitting profits in the sea freight market hard. Whilst crude prices have dropped, the worldwide demand for shipping has kept the bunker fuel price high, forcing ship owners to heavier fuels.
“Last year we saw crude oil prices hit an all time high of US$79 a barrel, which forced the bunker price to $350 per tonne,” says Simon Church, marketing manager, GAC Bunker Fuels. “However, because the freight market has been so buoyant across all sectors, there haven’t actually been as many companies getting into real financial difficulties in spite of this hike.”
The high cost of fuel has forced ship owners to extend lines of credit to record levels, which has had a number of effects on the way fuel is being purchased. “Some traditional oil majors have very strict credit rules, and actually reached a point last year where they could no longer supply to certain owners and shipping companies because their credit limits had been reached,” explains Church. “However, in market situations such as this there are other companies who can move in and capitalise on that, so shippers have managed to ride out the shock, despite the credit issues.” Even though the exposure has been higher and the credit lines stretched to the limits, there haven’t been many casualties in terms of ship owners going into bankruptcy.
However, the situation is not tolerable in the long term. “This situation will really bite if certain sectors of the freight market take a downturn, which we have already begun to see. In the third and fourth quarter of 2006 freight rates did suffer, particularly in the dry cargo and capesize sectors,” says Church.
In spite of the drop in the crude oil price, which has come down to $53 a barrel, the high demand in the freight market has meant that the bunker fuels price has not seen a comparable drop. “A drop of $30 a barrel should approximately equate to a reduction of $90 per tonne of fuel oil, however, the highs in Fujairah were around $320, and the price has only come down to $270, which is only a $50 drop,” says Paul Horan, general manager of GAC Bunker Fuels.
This has had an impact on the grades of bunker fuel being purchased by the major shipping lines. “We’re seeing more demand for very heavy fuels, which are near pure residual fuel oil, in places like Singapore,” says Horan. These fuels are heavier (contain very little gas oil) and cheaper and the larger tanker and container ships are able to adjust their technology quite easily to burn this fuel.
“The larger vessels that are coming onto the market now, such as the Emma Maersk, get through a vast quantity of this fuel, so if they can get a saving of $10 per tonne that’s a substantial cost saving,” says Horan. With the persistently high cost of fuel, “all ship owners are concentrating their efforts on adjusting to burn the heavier grades of fuel,” he adds. There is no significant engine conversion necessary and the newbuildings coming on line now all have the ability to burn heavy fuels.
Whilst the shipping majors are turning to these heavy grades, the European Union is enforcing ships calling at Baltic ports to burn the highly expensive, but more environmentally friendly low sulphur fuel.
“There has been a significant spike in the need for low sulphur fuels in relation to legislation coming into force in the Baltic Sea market. It is now illegal to burn fuels with sulphur content above 1.5%. Standard bunker fuel sulphur content is around 3.5 – 4%. It requires a different refining process, and attracts a higher premium because there is less of it produced,” explains Horan. “Currently there isn’t sufficient global demand for cleaner fuel to warrant an increase in the production of these low sulphur grades,” he adds.
The Baltic Sea is the only region where there is a sulphur cap in place, but plans to extend the zone to the North Sea and English Channel would have huge fuel cost implications for traders calling at Europe’s busiest container terminals.
“The owners would be subject to huge penalties if they were found burning standard 4% fuels in the area of jurisdiction, which means owners trading in those waters have to make arrangements to keep sufficient stock of low sulphur fuels in a separate tank,” says Church.
Legislative changes may impact European trades, but the biggest development in the global bunker fuel markets will no doubt be the activity already underway in China, where the state monopoly company, Chimbusco, is being challenged by an independent supplier in Shenzhen. Brightway Petroleum Group began trading late last year and is currently the only duty free bunker supplier in the Shenzhen port and region, which includes the key ports of Yantian, Shekou and Chiwan.
“This will no doubt attract a surge of competition and push the price down in China. A more competitive price will lead to a huge increase in demand there,” says Horan. Singapore is still the largest bunkering port in the whole of the Asia-Pacific Rim region. “Bunker demand in Singapore is still on an upward curve, demand is still rising – but what happens in China will have an impact. If China is able to market a product that can undercut Singapore, then obviously owners will pick up bunkers there and avoid the stop in Singapore and save on time delays,” says Church.
Fujairah has always been the dominant bunkering hub in the Middle East, and last year sold over 13 million tonnes of bunker fuels. However, such primacy is not assured looking forward. “Now we’re seeing the development of other sites in the region with aspirations of challenging that dominance, in Oman, Yemen, elsewhere in the UAE, and in Iran even, where firms are taking advantage of the loosening of state regulations and attracting more inward investment from multinational companies,” observes Horan.
“The whole region is undergoing a sea change in many respects. The high revenues associated with oil prices have allowed the governments and quasi-government firms to open up to new business opportunities,” says Horan. “There’s a huge flow of traffic coming into and out of the Gulf and currently the only rock solid places that can be relied upon for bunker fuels outside of Fujairah are Jeddah, and Suez, Salalah in Oman, and to a certain extent Aden. Apart from these locations there is very little else, so there is a gap in the market. In the next couple of years I think we’ll see some new locations that will be evolving – and that’s going to challenge Fujairah,” says Horan. Evolving markets in China and the Middle East will no doubt mean that Singapore will be the one to lose out on market share.
Technological developments are also affecting the bunker market, and improved refining methods may actually lead to a reduction in the amount of fuel oil hitting the bunker market.
“Oil majors are actually withdrawing slightly from the marine fuels market. Ultimately they’re after the highest return for their goods, and bunker fuels don’t offer that,” explains Church. Previously a quantity of residual fuel came on the market from refineries, but as technology has improved, and the refining process become more efficient, less and less residual fuel is hitting the bunker market,” says Church. Unfortunately for the marine business, that doesn’t mean there isn’t the demand for it. “We’re seeing the emergence of a new breed of independent companies joining the market now who are taking up the slack,” he adds.
Bunker fuel is the lifeblood of the industry, and developments in the geopolitical, technical, and legislative arenas have the power to cause shocks that can prove very painful for the shipping business. The promise of increased competition in the Chinese market, and in the Middle East bodes well for the sea freight sector. However, the question of how the increasing tendency towards heavier fuels will be balanced with more far reaching environmental requirements remains to be tackled by the maritime community.