Fuelling Up the Future

The bunker industry, especially in India, needs to adapt intelligently to new challenges and demands facing world shipping.

by Radhika Rani G.

Bunker prices are set to increase in the coming future pointing to increased cost of shipping even with record fleet growth suppressing earnings. Experts predict the fuel cost of propelling a ship will double by 2025.

Things that were simple for the shipping industry are not to be so, observes Bo Ellehave of the Sustainability division of Maersk’s Asia Pacific. Shipping, as an industry, was off the radar screen for long. “Fuel costs used to be low and predictable, environmental regulation limited and manageable and CO₂ emissions a non-issue.” More importantly, the ‘one-size-fits-all’ used to be the paradigm for marine fuels.

But not anymore. The bunker industry, Ellehave says, is likely to see high and volatile prices in the coming years and rise in regulation, customer expectations, accountability & transparency and competition. So, the immediate challenges for the fuel industry will be cleaner fuels at competitive prices.

While the oil price increase and global debt crisis have impacted bunker prices, newbuilds ordered during the boom in shipping have led to oversupply and thereby weaker rates. With a challenging economic situation, shipowners and operators have been under pressure to employ measures like slow steaming to save on their fuel costs, use clean fuel to meet emission norms and increase efficiencies and reduce costs due to pressure from charters. A thriving bunker market does not exist with an ailing shipping market, points out Tom Reilly, CEO of Chemoil. “The challenges are interconnected.”

Adapting to circumstances

Since fuel oil represents 60 per cent of a vessel’s operating costs, the main concern that shipowners/operators want to deal with is how to get cargo from A to B as efficiently and cost-effectively as possible, points out Lars Henrik of OW Bunkering. Given this scenario, fuel suppliers must be committed to go as deep as possible into the supply chain to optimise and reduce total cost of ownership, but increase efficiencies and profitability, Henrik suggests. 

Physical supply, experts point out, are dictated by market elements on a region by region basis. The continuing rise in crude oil prices, the Middle East turmoil and natural disasters no doubt have created pressure for suppliers. But, one way of overcoming this is by being a trusted counsel to customers giving them advice on the best fuel to use, technical know-how and effective risk management strategies to manage volatile prices, lock in costs and maintain profitability. In a way, bunker suppliers can look at all areas of physical operation for service benefits, notes Henrik. 

What’s in store

The supply-demand balance and prices will be influenced primarily by the demand for marine transport, environmental regulations and refiners’ propensity to invest and secondarily influenced by technological advances in fuel efficiency, use of alternative fuels and abatement. According to Robin Meech, a marine and energy consultant –

• The days of the bunker market being a convenient ‘sulphur sink’ for refiners is coming to an end
• But most refiners have little interest in the market and fuel oil is a loss making by-product
• Fuel oil desulphurisation is very unlikely
• Mid distillates are already the tight part of barrel – a switch by bunker market could not be supplied by 2020
• Meeting switching all bunkers to distillates would need investment approaching $200 billion in secondary refinery capacity
• Refining industry will not invest ahead of change and the uncertainty in the timing of the introduction of the 0.5 per cent global cap is exasperating the indecision.

Macroeconomic scenario

Also, shipping trade patterns are shifting to cater to more ‘localised’ and ‘zoned’ economic activity with BRIC nations all set to dominate the world economies in the coming decades. Between 2001 and 2010, the GDP of the BRICs – Brazil, Russia, India and China – rose beyond even economists’ expectations.  

Jim O'Neill, chairman of Goldman Sachs Asset Management, who coined the acronym, notes “the aggregate GDP of the BRIC countries has close to quadrupled since 2001, from around $3 trillion to between $11 trillion and $12 trillion. Terming the process as ‘Growth Markets’ while analysing their phenomenal progress in his new book The Growth Map: Economic Opportunity in the BRICs and Beyond, he sees trade opportunities swelling in the East. 

Gradually, Asia will cease to depend heavily on the US and Europe to buy its goods, says Adam Dupre, Managing Director of Ocean Intelligence. “Over time, the shipping businesses that have evolved to serve the old economic pattern – larger and larger ships to carry vast distances – will change,” he writes in his analysis ‘Managing Credit Risk for an Uncertain Future’. The new pattern will have smaller ships, covering shorter distances and this will in turn affect the whole industry, from shipbuilding through operations to supply.

Dominating this supply chain will be China, the world’ largest economy 180 years ago, and rearing to reach that point on the cycle again in the next two decades. “And the bunker sector will just have to follow,” Dupre observes. Asia, he says, will continue to dominate in bunkering and China is likely to become the centre of Asian bunker industry, eclipsing Singapore. Good news for India too!

India’s potential

The growth projections of emerging giants are sure enough promising for Indian maritime industry to act fast, but the potential is yet to be tapped to the optimum. Looking at the micro level in the bunkering industry, India’s strengths are its high growth, market share, financial investment and location of ports in strategic points. Yet, the country, when compared to bunkering hubs in the neighbourhood, lags behind in terms of port tariffs, old and inefficient infrastructure and bunker handling systems, rigid institutional framework, non-uniform and high tax structure and cumbersome documentation procedures. 

“While sales volumes are a long way off those of Singapore, Rotterdam or Fujairah, there is no doubt that tax-free or low taxed bunker sales would mean very competitive bunker prices and subsequently many more vessels berthing at Indian ports,” says Basheer Ahmed Sayeed, CEO of Chemoil Adani Pte Ltd.

The bunker industry also needs support from the government to improve its potential, say industry leaders. The regulations associated with bunker supply such as ISO8217:2005 and Marpol Annex VI need to be looked into, opines Chandan Samaiyar, Chief Executive of Gulf Petrochem. Also, there is need for the availability of bunker-grade product from Indian refineries to be competitive and compliant with international norms.

Going by Jim O'Neill’s predictions, India will attract global capital inflows into manufacturing and infrastructure sectors and cement trade tie-ups with the US, EU and China and SE Asian and South Asian trade blocs. This in turn translates into additional opportunities and pressures on the Indian bunkering sector, says Capt Anil Himat, director of Valencia Exim Pte Ltd.

With buoyant trade volumes plying on international trade routes through the Arabian Sea and the Indian Ocean, the Asian bunkering industry has it all to fuel up its potential. But for countries like India, the inherent challenges concerning infrastructure, taxation, procedures, logistics and above all government drive need to be addressed vis-a-vis burgeoning export capacity in coal & iron ore and other products. Waking up to the volatility around and buzzing with activity is a sure way of surviving the Asian tigers and dragons.

Alternative Fuels of the Future: Viability

The use of alternative fuels will accelerate after 2020

Solar Photo electric cells Solar furnace	Very minor impact on marine - Too costly - Requires a lot of space
Wind At least five types of sail Sky sail current favourite	Can provide up to 20% improvement - Max speed 15 knots - Unreliable
Ocean Currents Improving current data Better software	Up to 4.5 knots of speed improvement with same consumption - Following currents versus shortest route - Could improve efficiency by 15% on some routes
Vegetable Oils Edible Non-edible Algae	Unlikely for marine - Compete with food - Uneconomic - Not stable but low emissions
Biofuels Cellulosic sources Municipal waste Ethanol	Becoming more viable - Still twice the cost of fuel oil on energy basis - Low emissions
Coal	Low cost of energy but - Dirty - Low energy content - Awaits technological break through
LPG Available globally Marine technology exists	Some 40% most costly on an energy basis than fuel oil - Requires 40% more tankage volume

Source: Marine and Energy Consulting Limited

Photos courtesy: Peet de Rouw

Article published in Maritime Gateway, December 2011.