As January closes and the abstemious sprint for the nearest bar and many brief flirtations with veganism end in steak frites, we have had at least 31 days to consider the impact of IMO 2020. Before the audible groaning starts, let me just remind you that here in the UK the 31st January marked an even more auspicious/dreaded date, the commencement of the final chapter of Brexit. So if you think IMO 2020 is a bit stale, spare a thought for us Britons.
Dry Bulk's free-fall
The question that we've been asked more frequently than ‘when do the pubs open on 1st February?’ is what the impact of the higher fuel prices has been on the poor old dry bulk operators? So we put this question to some dry bulk operators, charterers and brokers, and their thoughts could be summed up in two words: ‘Who knows?’
The rationale for this answer is that from mid- to late-December 2019 (dependent on the sector in which the operator works) a rot has set into the dry bulk sector. Not just a little bit of dry rot on the garden shed, but full on, structurally dangerous, crippling rot. As a consequence, the operators that we spoke to said that the chance of passing on the cost of a postage stamp to a charterer, let alone the premium of VLSFO, was remote. ‘It’s every man for himself right now’ we were told. One operator said: ‘There’s just not enough activity to hold the market up, although the tonnage lists are actually not that long. It seems like, where possible, everyone is utilising their own tonnage on booked cargoes. The spot market is dead’.
But where the market is fixing (and when the numbers come in in a few months time, the actual demand figures probably won’t be that bad), there are definitively two tiers. The ‘haves’ are the scrubber-fitted vessels, the ‘have nots’ are those labouring with VLSFO. An operator told us that the premium for scrubber-fitted vessels was substantial at the start of January 2020. He told us that ‘The spread between the two fuels types was over USD300, which meant that those using the old stuff were miles ahead.’ However, since then that spread is falling fast (sub USD200 in certain ports), so while the scrubber boys and girls are high-fiving, the pats on the back are getting lighter and less frequent.
One phenomenon for the scrubber-fitted ships is how they use the equipment in the negotiating process. Another operator that we spoke to was highly critical of those controlling the scrubber-fitted fleet. ‘I don’t get it. The owners with scrubbers, which I think are an absolute embarrassment anyway, seem to be adding a little premium over their real voyage costs rather than taking a little bit off the non-scrubber cost. Instead of a major premium they are giving it all away’ we were told. But not everyone agrees with this. A broker told us that owners with scrubber-fitted ships are telling him that they will only fix on voyage terms and are avoiding even mentioning the scrubbers in vessel descriptions (there are no particular requirements to do so on voyage terms). ‘I’m not sure how many charterers wouldn’t check if a ship had scrubbers before accepting a nomination, but at least people are trying!’ he said.
A charterer's perspective
A charterer told us that he was absolutely expecting to pay more for his voyage charters as a result of the changes in fuel regulations. ‘How can you avoid it? It’s there in the calculations if you want to see it. I’m sure everyone will be working off similar bunker prices when we receive offers [on our cargoes]’ he said. However, when asked if he was checking with operators as to what bunker prices they were using he said that he wasn’t. ‘We really don’t see the point in getting into the specifics of the freight calculation. If the operator gives us a price for our freight then that’s the price. We don’t ask about their underlying TC costs, so why ask about this?’ he said. And that principal does tend to sum up the charterer attitude very succinctly; the price is the price, take it or leave it. But with time charter rates in free fall it appears that charterers are not even having to consider this issue. When asked about trying to hide what was going on with scrubbers and fuel from charterers an operator said ‘I don’t think charterers like the idea of us making any profit at all. So if we told them we had done something clever with the fuel they’d say ‘well done, and how much discount will you give me as a result of our good fortune?’’.
Where now for operators?
The concept of the struggling operator is not "new" news. If brokers had a buck for every time an operator that didn’t win a cargo sent a sharp email back to him explaining why the winning operator was doing it at less than break-even, or far below what the equivalent time charter rate that that route is currently paying, then they would likely have enough money for a long lunch plus wine by November each year. When asked if he was considering doing some time charters to cover his current shipments another charterer said ‘Every time we look into this it just doesn’t make sense compared to what we are getting offered on voyage terms’.
Scrubber-fitted ships are cheaper to run if using the old fuel. That’s a fact. The amount is variable, dependent on things like the duration of the voyage and the ship type, but also the spread on the fuel at the port where the ship bunkers (which varies considerably). Some will be winners, some won’t. A broker summed it up rather succinctly though when he said ‘It’s [IMO 2020] not helped much. Things are a lot more complex as there are now more options and variables to think about, but overall the main problem today is the freight rates. Whatever you do in this market it is still a rough way to try to make a living’. Thank goodness ‘dry January’ is over now, because we may need a stiff drink or two while we wait for the market to pick up again.
If you are interested in discovering how our expertise can support your organisation with compliance, credit reporting, and risk management, download our KYC Fundamentals booklet now.