A lot has been written about the new rules agreed by the International Maritime Authority (IMO) 2020 where ships will be forced to switch to a Low-Sulfur Fuels or risk being fined.
There does seem however a great deal of uncertainty of how the new rules will be enforced, and how the shipowners will comply with the new regulations with all sorts of different permutations on the horizon.
For example, what happens if there is no supply of LSFO and the ship has now option to burn the wrong type of fuel just to keep moving? Should they be fined? Or if they wait for the supply, the said cargo won’t be delivered. This will have a knock on effect, ultimately hurting the consumer in the long run.
A more unscrupulous shipowner may pay the cheaper bunker rates for dirty fuel, charge a premium on the freight price claiming it is compliant with IMO 2020 and then just pay the fine, it could make economic sense for them.
Shipowners are taking action to make the world a cleaner place using the cleaner fuels, but they could argue why should they bear the brunt financially? The global pollution problem falls upon everyone.
At the end of the day the most likely person to suffer will be the consumer as there is no doubt that these costs will be passed on, as mentioned in this Reuters article, IMO 2020 could be the lever that tips the global economy into a recession. The real question is how much will be passed on. Shipowners will have a buffer and some may argue that they could pass a lot more costs on than required and end up creating more income.
From a trading point of view, and with such a clear supply and demand issue on the horizon how are companies handling this? Hedge funds and money managers are net buyers of futures and options since the beginning of the year. As with all things, once the paper players get involved, sometimes the paper moves somewhat differently to reality in the physical world. The prices have still not shifted upwards which could signal a major over supply of LSFO than is required, and that the prices could in-fact fall.
Only time will tell, but taking everything into consideration in these times of uncertainty, managing your company’s risk and position has never been so important.
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