As the new year began, fuel prices were boosted by the implementation of the IMO 2020 regulations, which shifted some 80-90% of bulkers and tankers from high sulfur fuel oil (HSFO) to 0.5% very low sulfur fuel oil (VLSFO). Despite assurances from analysts and refiners that VLSFO supplies would be ample, the VLSFO vs HSFO premium, or differential, jumped from $250 per tonne in November to an average of $300 per tonne by the end of December, and in early January it topped $350 per tonne in some ports, most notably in Singapore.
The shift in fuels has raised voyage costs significantly. While nearly all ships were burning HSFO in 2019, at an average price of less than $400 per tonne, most ships must now burn VLSFO, at an average of price of $670 per tonne (as of early January).
Meanwhile, what is clear from the widening VLSFO/HSFO price differential is that scrubber investments are currently paying off big time! For VLCCs with a scrubber, we estimate that they are saving $20,000 per day in fuel costs vs. ships without a scrubber, leading to a premium in net earnings equal to this amount (subject to negotiation with the charterer), while Suezmaxes with a scrubber are seeing a $12,000 per day premium, and Aframaxes are earning $9,000 per day extra. On the product tanker side, MRs with scrubbers are currently seeing a $7,000 per day premium.
In the dry sector, for Capes with a scrubber, we estimate that they are earning a $10,000 per day premium vs. ships without a scrubber, while Panamaxes with a scrubber are seeing a $5,500 per day premium, and Supramaxes are earning nearly $5,000 per day extra.
But these premiums are expected to shrink over the next couple of years, as the VLSFO/HSFO price differential is seen falling from more $300 per tonne in 20Q1 to $250 per tonne by 20Q4, and to just $150 per tonne by the end of 2021, as shown in the chart below. Accordingly, the VLCC scrubber premium is projected to fall to just over $9,000 per day by the end of 2021, while the Cape earnings premium is projected to fall to $4,500 per day.