Market volatility: How to prepare your bunker budget
The upcoming introduction of shipping to the European Union’s emissions trading system (ETS) represents a revolution for the bunker industry, an attempt to charge marine fuel consumers for their greenhouse gas emissions.
From next year, the EU plans to require cargo and passenger ships over 5,000 GT in size to purchase emissions allowances covering the GHGs from their bunker consumption. The system will cover 100% of the emissions from intra-EU voyages, and 50% of those between the EU and elsewhere in the world.
A gradual phase-in has been agreed, meaning ships will pay 40% of the costs in 2024, moving to 70% in 2025 and 100% in 2026.
Rune G. Kongstein, Managing Director of Glander International Bunkering in Tønsberg, recognizes that EU ETS will shake up the shipping and energy sectors indefinitely. Based in Norway, a country that takes a strict stance and leads innovative efforts towards greener shipping, Kongstein says “This new trading system will affect not only shipping companies, but it will require new financing terms, stricter reporting and better cooperation among all players in the industry.”
The impact of the regulation will be profound, firmly positioning energy and related expenses as the largest cost for the majority of shipowners and may fundamentally change their relationship with bunker suppliers.
In the short term, the focus will fall on immediate changes that can be made to minimise EU-ETS costs.
If the UK proceeds with current plans not to apply its own emissions trading system to international shipping, there will be a strong incentive to bring cargoes from outside the EU to UK waters rather than the EU to cut the length of voyages encompassed by the EU-ETS jurisdiction. North African ports may see similar benefits.
Slow steaming, already brought to the fore by the International Maritime Organization’s CII regulation, may become the default choice in all but the most lucrative freight markets. Experts predict that this will exacerbate the longer-term secular trend of a decline in conventional bunker demand driven by improvements in energy efficiency.
Demand for biofuel bunker blends is likely to surge as the EU-ETS costs applied to conventional bunker use narrow their price premium over VLSFO. This growth may be stymied by limited availability of ISCC-certified biofuels, and producers may compete to secure ever-larger supplies of sustainable feedstock for the fuels.
In the medium term, shipowners trading in Europe could rush to equip their fleets with as much energy-efficiency technology as possible, both for newbuilds and in retrofitting existing ships. Sellers of air lubrication systems, friction-reducing paint, hull cleaning systems, wind-assisted propulsion technologies and energy-saving modifications to bows, hulls and propellers are all likely to see sharp rises in their orderbooks in the coming years.
These technologies will all add to the longstanding downward pressure on conventional bunker demand.
Over the longer term, the regulation could potentially drive more shipping firms towards ordering tonnage capable of running on zero-carbon fuels. Sellers of green ammonia and methanol, as well as bio- and synthetic LNG, may start to see a much larger share of marine energy demand coming their way.
At present, investment in methanol- and ammonia-fuelled tonnage is mostly coming from shipping companies concerned with their green credentials. But as shipping firms dealing with European voyages start to feel the full brunt of EU-ETS costs from 2026 – and as EU emissions allowance costs rise on increased demand – alternative fuels will likely edge towards becoming the default choice for new buildings.
But for the bunker industry, the biggest change that is anticipated by industry experts will be shipping companies’ attitudes towards their energy suppliers.
In the pre-IMO 2020 era when shipping was taking a cheap by-product from refineries as its main energy source, shipowners could afford to treat bunker costs as an afterthought that somewhat required less attention. That will have to change, with both advantages and disadvantages for the bunker industry.
Malpractice that emerged while bunker fuels were cheap will no longer be tolerated at a time when fuel costs more than $1,000/mt with emissions allowances included.
Shipowners will come to terms with the high energy costs brought by using emissions allowances, and the even higher ones from using zero-carbon fuels, but bunker suppliers may need to raise their game in terms of the quality of service delivered to keep their customers.
That will mean much more robust systems to reduce quantity and quality disputes and demonstrate regulations compliance, as well as a more in-depth relationship between bunker supplier and buyer to work together on how to minimise emissions and improve efficiency.
Industry experts are already predicting a rise in contract sales, as shipowners move from spot purchases to long-term relationships with suppliers that guarantee availability and quality of service over a period of time.
Inevitably, not all suppliers will be able to work well under the new system, and a shaking-out of the industry can be expected as some smaller players are absorbed into large ones. Reputation will be key for bunker suppliers in the coming decades: those known for quality of service will be the ones that thrive.
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