Russian invasion pushes ship fuel prices to historic highs

The price of fuel for ships was flirting with a new record even before Russia invaded Ukraine. Then war broke out and the peaks of the past were left far behind. Ship fuel costs have “gone parabolic,” Braemar ACM Shipbroking said.

To the extent that the increased cost of fuel is passed on to shippers of containerized cargo and bulk cargo such as oil and grain, it will contribute to inflation. To the extent that it is not transmitted, it will reduce the bottom line of shipping.

Ships used to burn high sulfur fuel oil (HSFO) until the IMO 2020 environmental regulations came into force two years ago. As of January 1, 2020, ships are required to burn a more expensive fuel with a sulfur content of 0.5%, known as Ultra Low Sulfur Fuel Oil (VLSFO). Ships equipped with exhaust gas scrubbers can continue to burn HSFO, which has a sulfur content of 3.5%.

According to Ship & Bunker, the average price of VLSFO at the world’s top 20 bunkering ports hit $882.50 a ton on Thursday, up 73% year on year. In Fujairah, United Arab Emirates, one of the largest bunker (fuel for ships) centers in the world, the price of VLSFO rose to $922.50 per ton. These price levels are unprecedented.

The average price of VLSFO at the top 20 ports has climbed nearly $130 a ton since Russian forces entered Ukraine. Marine bunkers are “galloping,” broker Fearnleys said.

The previous average daily high for VLSFO in the top 20 ports – $693.50 per ton – was recorded by Ship & Bunker on January 8, 2020, at the height of the IMO 2020 transition. , HSFO had reached highs of $746 per ton in March 2012 and around $750 per ton in July 2008.

No more pricing issues for container shippers

Container shipping lines pass on higher fuel costs to freight shippers through quarterly bunker adjustment factors (BAFs) and emergency bunker surcharges. “Substantial BAF increases are ahead,” Vespucci Maritime CEO Lars Jensen warned in an online post.

The second quarter 2022 BAFs already announced by the carriers show continued increases, and these increases could be supplemented by emergency surcharges.

CMA CGM, Cosco, Evergreen and OOCL second-quarter 2022 Asia-West Coast BAFs averaged $648 per forty-foot equivalent unit, up nearly $80 per FEU from the current quarter and up 49% over a year. Asia-East Coast BAFs for these four carriers in Q2 2022 averaged $1,236 per FEU, up $115 from this quarter and 48% year-on-year.

The only consolation for freight shippers is that the extra cost of fuel pales in comparison to the increase in base freight rates. According to Drewry, Asia-West Coast rates increased by $6,728 per FEU year-over-year. This is more than 25 times more than FBAs have increased over the same period.

More savings for ships equipped with scrubbers

It is not just the price of marine bunkers that is increasing: the gap between VLSFO and HSFO is also increasing, a particularly important development for tankers and dry bulk traffic. On on-site travel deals, owners pay for fuel. Some ships have scrubbers and burn cheaper HSFO; the majority do not and should use VLSFO.

On Thursday, Ship & Bunker put the average price for VLSFO in the top 20 ports at a premium of $234 a ton over HSFO. The last time the gap was this wide was at the start of 2020, during the IMO 2020 fuel transition.

The wider the spread, the more owners of ships equipped with scrubbers benefit.

The most extreme example, on paper, is in the tanker sector. According to Clarksons Platou Securities, a very large crude carrier built before 2011 (VLCC; a tanker that carries 2 million barrels of crude) without a scrubber (i.e. burning VLSFO) earned the equivalent of $11,500 per day in the spot market on Friday. . A VLCC built before 2011 with a scrubber, burning cheaper HSFO, saved $12,600 per day, meaning it earned $24,100 per day, more than double the revenue of a VLCC without a scrubber.

Clarksons estimates that the all-inclusive cash breakeven rate (including finance costs) for such a vessel is $25,000 per day, meaning the scrubber-equipped VLCC is close to breakeven, while VLCC without a scrubber is effectively losing $13,500 per day. .

The S&P Global Platts indices have tracked the benefits of scrubbers over time. Its Cape T4 indices assess rates for Capesize dry cargo carriers (bulk carriers with a capacity of approximately 180,000 deadweight tonnes or DWT) with and without scrubbers.

On Thursday, Platts priced the Capes without scrubbers at $8,842 per day, while the Capes with scrubbers saved $8,202 per day in fuel, bringing revenue to $17,635 per day, or nearly twice as much as non-scrubber Capes. Clarksons puts the all-inclusive cash breakeven rate for 5-year-old capes at $16,000 per day, implying that scrubber-equipped capes are in the black, non-scrubber capes deep in the red. The last time the Cape T4 index showed such a large spread was in January 2020.

Advantages for certain public companies

Jefferies analyst Randy Giveans outlined what the gap means for stock shipping in a new client note.

“In terms of who will benefit versus who will be harmed in an environment of rising bunker fuel costs, we believe owners of ships with scrubbers in areas where rates are rising will benefit the most. The increase in spot rates will help offset the rising cost of bunker fuel, while the expanded fuel allocation will benefit owners of scrubber-equipped vessels through substantial fuel cost savings.

Jefferies assessed seven US-listed shipping companies based on two factors: their estimated one-time exposure in 2022 and the share of their capacity equipped with scrubbers. At one end of the spectrum are Star Bulk (NASDAQ: SBLK), Eagle Bulk (NASDAQ: EGLE) and Scorpio Tankers (NYSE: STNG), which are almost entirely dot-exposed and have scrubber coverage of 97%, 90 % and 76%, respectively.

At the other end are companies like Frontline (NYSE: FRO), Safe Bulkers (NYSE: SB) and International Seaways (NYSE: INSW), with scrubber coverage of 48%, 37% and 20%, respectively. . Safe Bulkers also has a lower cash exposure, at 77%, with a time charter hedge of 23% (in a time charter, the charterer pays for the fuel, not the owner). While these companies would still benefit from a wide HSFO-VLSFO spread if spot rates rise, public companies at the other end of the spectrum – with higher scrubber coverage – would benefit more.
Source: Greg Miller, Managing Editor, FreightWaves (