It was another warning sign about inflation: the price of fuel for commercial ships jumped after Russia invaded Ukraine and reached historical highs in May and June. But now this trend has reversed. The price of marine fuel fell in July and August and is now back to about pre-war levels.

The average price of the fuel, known as very low sulfur fuel oil (VLSFO, sulfur content: 0.5%), was $800 a tonne at the world’s 20 largest gas stations as of Friday, according to Ship & Banker. That’s down 29% from its all-time high of $1,125.50 on May 14. Just before the war, VLSFO averaged about $750 per ton.

Ships with exhaust gas scrubbers can burn a cheaper fuel with a sulfur content of 3.5%, known as high sulfur fuel oil (HSFO). Vessel and bunker data show Friday’s average HSFO price among the top 20 fueling centers at $571.50 per tonne. This is 26% below the record high of $769.50/t on May 5 and several dollars below the HSFO average just before the Russian invasion.

Based on top 20 port averages (Chart: American Shipper based on data from Ship and bunker)

But to put the pullback in a larger context: While the benefits of the war have largely disappeared, today’s VLSFO prices are still higher than at any point in history through 2022, eclipsing earlier HSFO spikes in 2008 and 2012.

VLSFO-HSFO fuel delivery halved

The difference between VLSFO and HSFO shows the savings realized by scrubber vessel operators. That spread is also down sharply from recent highs, though it’s still wide enough to justify an investment in scrubbers.

IMO 2020, the regulation mandating a global transition to low-sulfur fuels, came into effect on January 1, 2020. During the early transition period, in January 2020, the VLSFO-HSFO spread jumped to $315 per tonne. After the war it was easily surpassed.

Based on vessel and bunker averages for the 20 largest loading ports, the spread peaked at $420.50 per ton on July 5. It’s now nearly halved to $228.50 a tonne as of Friday.

Based on top 20 port averages (Chart: American Shipper based on Ship & Bunker data)

Distribution has a major impact on spot returns on the ship day for bulk commodities. Such vessel operators pay for fuel in spot deals, so savings increase profits.

The 2015-built non-scrubber very large carrier (VLCC) burning VLSFO made $14,800 a day in the spot market on July 5, when the spread was at its peak, according to data from Clarksons Securities. The same vessel with a scrubber burning the cheaper HSFO saved $17,900 a day in fuel costs, meaning it earned $32,700 a day net of fuel on 5 July—more than double that of a non-scrubber VLCC.

Clarksons estimated the 2015-built non-scrubber VLCC made $54,400 a day on Monday. (Rates have risen sharply since July due to both higher demand for tankers and lower fuel prices.) The same vessel with a scrubber would save $8,400 a day in fuel, less than half the July savings. A scrubber-equipped VLCC will generate $62,800 per day, 16% more than a non-scrubber VLCC.

Effects of fuel in container transport

Container lines compensate for higher marine fuel costs by adding bunker correction factors (BAFs) to contract rates. Carriers increased BAF every quarter from Q4 2020 to Q3 2022.

On site, however, carriers are exposed.

In March-May, when marine fuel prices soared after the war, the Drewry Shanghai-Los Angeles spot index fell 25% and the Drewry Global Composite Index fell 19%. The carriers did not reimburse the additional fuel costs.

Spot rates in dollars per FEU. Blue line: Global Composite, Green line: Shanghai-Los Angeles (Chart: FreightWaves SONAR)

On the one hand, a drop in the price of marine fuel could give spot rates more freedom to fall. Vespucci Maritime CEO Lars Jensen said in a recent blog post: “During the spring and early summer, rising fuel prices acted as a ‘brake’ that prevented spot rates from falling too quickly. Now the situation has changed.”

On the other hand, the decrease in marine fuel prices will have a positive effect on the cost price of liners. Carriers are inherently conservative in their management. They probably assumed that fuel prices would remain high in the second half when they set their expected earnings.

Hapag-Lloyd CFO Mark Frese said in a recent conference call: “Unfortunately, the terrible war in Ukraine and the resulting uncertainty in international energy markets have led to a significant increase in oil prices and therefore bunker prices. Thus, the strong increase in oil prices became the main factor in the increase in the unit cost of production [in Q2 2022]resulting in much higher bunker costs.”

Hapag-Lloyd CEO Rolf Habben Jansen said his company’s updated guidance for the full year implies that “the price of fuel consumption will definitely rise.” Carriers’ bunker costs will certainly increase year on year. But the increase may not be as large as previously thought if prices remain at current levels or ease further in the second half.

LNG marine fuel prices are on the rise

Another variable in the cost equation is the use of liquefied natural gas (LNG) as a bunker fuel. LNG has been touted as a cleaner option than VLFSO when switching to the use of future types of fuel such as methanol, ammonia and hydrogen.

A large number of newbuilds have been ordered with dual-fuel capabilities, allowing them to consume either conventional fuel or LNG. Classification society DNV said in early May that it had ordered 155 LNG-capable container ships, as well as 90 tankers and 51 bulk carriers.

On its latest conference call, shipping line company Zim (NYSE: ZIM), CEO Eli Glickman said that 28 of the company’s 46 chartered newbuilds scheduled for delivery in 2023-2024 will run on LNG.

“About a third of our capacity can run on LNG if we get these vessels,” Glickman said. He argued that the new ships would save fuel, offer a lower cost structure and help the company and its customers meet environmental, social and governance (ESG) goals.

The problem with ships running on LNG is that the Russian-Ukrainian war has dramatically increased the cost of LNG. And unlike traditional marine fuel, there was no price reversal as the conflict dragged on. On the contrary, LNG prices reached new highs on Monday.

Data from the Port of Rotterdam in the Netherlands showed a sharp drop in LNG purchases for bunker fuel in the second quarter of 2022. Volume fell to 63,497 cubic meters, down 60% from the second quarter of 2022 and 43% from the first quarter of this year. “The rally in LNG prices has affected demand for the fuel,” writes Argus.

According to data from Ship & Bunker, the LNG bunker fuel price in Rotterdam is currently 4.8 times higher than VLSFO and 6.6 times higher than HSFO.

(Chart: American Shipper based on Ship & Bunker data)

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