The middle distillates cracks will start increasing in the 2nd half of 2019 and peak in 2020. The peak may not be in the start of 2020 as enforcement will tighten with March'20 HSFO carriage ban. While inventory levels of previously stocked LSFO will gradually be worked off. Allegedly, there are more than 28 mn bbl of LSFO stocked in ships near Singapore port acting as floating storages in expectations of windfall gains from spike in prices starting Jan’20.
One aspect which refiners need to look at carefully is blending. Blending incompatible products may lead to products getting separated and formation of sludge which will choke the filters of ships engine.
How the Older, Simpler refineries are coping up?
The older, simpler refineries primarily in Europe and former Soviet Union are the most affected since they are the largest producers of Fuel Oil. They have to take costly low sulphur crude to make in-stream LSFO. Many of the refiners like Shell at Pernis, Netherlands and Total at Antwerp, Belgium are putting up a solvent de-asphalter (SDA) and hydro crackers while others like ExxonMobil at Antwerp, Grupa Lotos at Gdansk, Poland are putting up delayed coker due to which they will be able to make cleaner transport fuels including IMO compliant MGO. Many more refineries including Preem at lysekil and Gothenburg in Sweden, Neste in Finland, ExxonMobil at Fawley, UK are upgrading their refineries.
What will happen to HSFO?
With drastic drop of HSFO consumption in the shipping industry, the consumption in power generation and industrial uses is expected to drive the future of HSFO. In 2018, Saudi Arabia has started using HSFO heavily for power generation, desalination and air conditioning in the summers. HSFO is expected to displace 200 thousand b/d of crude burns for electricity generation in Saudi Arabia in 2020.
Bangladesh is another country which has been adding fuel oil and diesel fired power generation capacities to meet chronic power shortage. Bangladesh has a potential to absorb more than 150,000 b/d in 2020. In addition many of the small countries like Cuba, Sri-lanka, Madagascar, Lebanon, etc have smaller power generation units both on land and floating on water to meet peak power demand. The cheaper HSFO will be an attractive alternative to these nations for saving costs.
Who else will MARPOL Impact globally? Iron ore: 68.4% of iron ore produced is exported globally. China accounts for 69% of iron ore imports. Freight accounts for 27 to 31% of the landed cost. Brazil and Australia are among the largest exporters of iron ore to China however with freight considerably higher from Brazil, the trade balance is expected to tighten. Every 100$/t increase in fuel oil price will make Brazilian exports dearer by 1.6% than Australia*.
Agriculture: The market for agricultural products is particularly reliant on low freight costs. Arbitrage flows covering a longer distance are most likely to come under pressure. Corn exports from Brazil and the US to Europe, Black Sea corn and wheat shipments to the Far East and biodiesel imports to Europe from China may all be under threat in 2020*.
Metals: Anode coke, a key component in the anodes to produce Aluminium is made from low sulphur residues in coking units. However with low sulphur residue being diverted to fuels, the prices may rise by 1 – 2 % which will be further compounded by higher logistics costs of both finished and raw materials around the world*.
The Turning Tides will be felt across the Global Trade & Supply Chain