Switch to low-sulfur fuel or install scrubbers: How the costs will be recovered?

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The 1st January 2020 is not far away however the market concerns on whether to burn low-sulfur fuels or install scrubbers still remain. Whether Shipowners decide to go with one or the other solution, it is still unclear who will bear the lion’s share of the costs, which market players estimate to increase by as much as $1 billion or even more.

In both cases, it is expected that Shipowners will try to pass on the additional expenses (either operating or capital) to their charterers via increased freight rates. Due to this reason, Charterers closely follow all developments in order to use the fuel-adjustment mechanisms to their benefit and return some of the increased costs back to the Shipowners. Therefore, the coming months and until the situation becomes clearer, this is going to be a hard bargaining game between Shipowners & Charterers.

So which of the two options will offer an easier recovery for the additional expenses involved? The answer to this question is not yet straightforward.

Some Shipowners/operators believe that passing on to Charterers the additional operating costs in case of burning low-sulfur fuel will be easier than passing on the capital cost of investing into scrubbers. Such approach makes sense since the operating cost will be actual and easier to get justified, while to estimate and charge the depreciation cost of the capital investment one will need to estimate the benefit that Charterers will make out of this equipment. This might be more sensitive to parties’ negotiations.

On the other hand, those who believe in scrubbers say that even if the additional capital expense may not fully pass to Charterers, Shipowners will be highly benefited due to the high premium on the prices of the low-sulfur fuels and the subsequent short payback period of the investment into scrubbers. However, a safe evaluation of this approach still remains foggy since we are not aware of the difference on price between the two fuel types and whether this price gap will sustain in the long-term.

While there is a large ongoing discussion on the difficulties that the new requirements shall bring to the market, there may be some positive influence as well. In particular tanker operators believe that this new IMO regulation might have some positive effect on the economics of the tanker market, as a result of a grow on demand since their Charterers (oil companies) will be benefited from the higher oil prices and might increase trade volumes.

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