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Healthy profit margins for bunker suppliers may be needed to ensure fuel quality. File Image / Pixabay
Brokerage NSI has responded to KPI OceanConnect's warning of higher oil prices leading to bunker quality problems this year, saying low margins are more likely to be the culprit.
On Tuesday KPI OceanConnect CEO Søren Høll said some of the VLSFO quality problems anticipated before IMO 2020 might come to pass this year with oil prices recovering from their crash last March.
'There have been fewer quality issues than many analysts predicted, but this may have been partly masked by the pandemic and the depressed oil price,' Høll said.
'These challenges may rear their head once the world starts to recover from Covid-19, distillate demand increases in other industries, and if unscrupulous suppliers start using cheaper components for blending.
'As we saw in early 2018 from ships bunkering in Houston, these fuels might be ISO 8217 compliant, but they can still cause mechanical and safety issues.'
Paul Hardy, head of business development at NSI, wrote a note to clients on Tuesday taking issue with part of Høll's argument.
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I do not follow the logic that the quality risk is down to the rise in crude.
'I do not follow the logic that the quality risk is down to the rise in crude,' Hardy said.
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'If we look at the Houston problems of 2018 then these could be correlated to price rises, but then by the same logic from 2011 to 2014, when the crude market was much higher, we did not see the same problems.'
A contamination crisis hit the bunker industry in 2018 as fuel quality problems first discovered in the US Gulf were exported to hubs around the world, leading to several engine failures.
Incentives to deliver poor-quality fuels are more likely to come from low margins, Hardy said.
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'I would argue it is when there is a collapse in the bunker premium over the cargo price,' he said.
'It is clear if you cannot sell as bunkers at a significant premium over cargo then one of three things has to happen: the actual quantity delivered has to drop, short-cuts are taken with blending or companies go bust.'
Hardy mentioned Singapore's introduction of mandatory mass flow meter use for fuel oil bunkering in 2017, which did much to reduce the problem of quantity disputes at the port, as an example of restored margins prompting a higher-quality service.
'Almost overnight quantity problems diminished and a structural margin was restored allowing suppliers to sell above the market,' he said.
'Logically if markets are rising, then if unhedged you naturally make more money as a supplier, so why cut corners?
'Likewise, if you are hedging you are able to lock your buying price further in advance and then sell on a rising market.
'In my eyes, do not look for absolute price as determinant of potential quality concerns, look at the bunker premium in specific markets and ask if it is sustainable.
'It is very clear in these cases where the quality problems have occurred and most likely will occur.'
Ship & Bunker News Team
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