Are You Ready for IMO 2020?
August 05, 2019
Next year, IMO 2020 will add a new level of complexity to commodity trading – disrupting demand for oil, raising shipping costs, and causing potential shipping stoppages. It’s only six months away, so commodity trading companies need to start preparing now.
What is IMO 2020?
The International Maritime Organization (IMO) has ruled that beginning on January 1, 2020, marine vessels must switch to lower sulfur fuels to reduce sulfur emissions by over 80%. The current maximum fuel oil sulfur limit of 3.5 weight percent (wt%) will fall to 0.5 wt%. This is the largest sulfur reduction in transportation fuel undertaken at one time.
The marine sector is responsible for half of global fuel oil demand. IMO sulfur regulations have the potential to be highly disruptive to both the pricing and availability of compliant fuels.
What does this mean for commodity trading?
The majority of the world’s commercial fleet will shift from fuel oil to middle distillate-based bunkers, so refiners will need to increase crude runs to maximize distillate output for the shipping industry’s needs. S&P Global Platts Analytics forecasts a bunker demand shift of about 3 million b/d next year.
Refiners will blend new marine products using the 0.5% sulfur limit as their target, but little is known about what these new blends will look like. A wide range of products is expected to be offered, presenting significant challenges to shippers. What happens when shippers switch blends? What if some blends prove incompatible? For example, when a more aromatic 0.5% product is mixed with a more paraffinic blend, the products could separate and form sludge, blocking filters. The risk of engine failures across the globe in 2020 is real.
The costs of ocean-going freight will increase as the marine sector uses more costly fuels, increasing commodity costs. Growing demand for middle distillates could result in upward price pressure on fuels such as diesel and jet fuel as well, increasing costs for rail, truck, and air shipping as well.
How can commodity trading companies prepare?
The best way to prepare for potential price shocks or supply chain disruptions is to evaluate the possibilities and create contingency plans.
- Optimize logistics. Choose the best logistics routes based on product cost, routes, processing, customs, finance, and other general costs.
- Identify the best trade scenarios under current, or “normal,” circumstances. Log potential prices and margins using optimized logistics.
- Run simulations. Stay prepared for future price volatility by generating possible scenarios for sale or purchase if disruptions or price shocks occur. What happens if fuel costs increase 25% for ocean-going freight? Does that make trading with China more profitable than trading with Canada? What are other shipping options?
- Evaluate alternative trade scenarios. Choose the best trade scenarios by evaluating simulations and analyzing product costs, routes, customs, finance, etc.
The best weapon in uncertain markets is data and analytics. Running simulations, you can evaluate the potential impact of higher prices, shipping delays, and vessel shortages months in advance, and create contingency plans to ensure your products are impacted as little as possible. Planning ahead ensures you are not left behind.
Mary DeFilippe spends her days creating engaging content – blogs, white papers, articles, and more – that helps readers better understand new technology. She can frequently be found walking around the office listening to heavy metal music while pondering ideas for her next blog.