Wider Hi-5 bunker spread favors scrubber adoption in dry bulk vessels

Demand for exhaust gas cleaning systems, or scrubbers, in dry bulk vessels has been increasing because of widening prices on the Hi-5 spread, the spread between high sulfur fuel oil, or HSFO, and very low sulfur fuel oil, or VLSFO, following Russia's invasion of Ukraine, market sources said.

Bunker prices surged to record highs after Russia invaded Ukraine in February amid anticipated tightness across all grades of fuel.

"In the days following the invasion, we have seen dry bulk freight rates being more affected by bunker prices than demand and supply fundamentals," a shipowner said.

"If the market is strong, bunker prices inflate it a bit further, owners are more able to pass the cost rises of bunkers to charterers. However, if the market is weaker, owners have to swallow a greater proportion of cost rises of bunkers," the shipowner added.

Since Russia's invasion of Ukraine, the spread between HSFO and VLSFO prices in Singapore, the world's largest bunkering port, increased to almost $300/mt at the peak of prices, and most recently settled around $150/mt.

"The wider the spread, the better for scrubber economics," the same shipowner said.

"Scrubber-fitted vessels offer more savings amid current bunker costs environment with the HSFO and VLSFO spread remaining wide," a second shipowner said.

S&P Global Commodity Insights' Scrubber Premium Index, which shows the premium that a scrubber-fitted ship can earn on the day compared with vessels burning 0.5% sulfur bunker fuel, reached $4,624/d March 9, the highest level since Feb. 3, 2020, when it stood at $4,700/d. Since the assessment was launched, the record-high level for the Premium Index was $6,159/d Jan. 7, 2020 at the onset of the IMO's 2020 regulation implementation.

The price was most recently assessed at $2,375/d April 1.

"If this continues, owners with scrubber-fitted vessels will increase the premium for their vessels even more," a shipbroker said.

However, market sources noted that HSFO prices could follow VLSFO prices upwards, with the volume of Russian-origin HSFO decreasing due to sanctions placed on Russia.

"If HSFO prices are increasing too, that might mean the spread is narrowing, hence slightly worse for scrubber-fitted ships," the first shipowner said.

Scrubber usage continues to rise

The International Maritime Organization, or IMO, banned HSFO as a marine fuel without the use of scrubbers since Jan. 1, 2020. Shipowners had two routes to compliance: install scrubbing technology and continue to buy cheaper HSFO, which has a sulfur content of 3.5%, or use compliant, more expensive VLSFO fuel with 0.5% sulfur content in the main engines. The IMO agreed in its initial greenhouse strategy in 2018 to reduce the carbon intensity in the global fleet by 40%, in comparison to 2008 levels, by 2030 and to reduce greenhouse gas emissions by 50% by 2050.

The shift away from high sulfur fuel oil to the IMO's global low sulfur mandate, which started Jan. 1, 2020, showed the market's ability to cope with energy transition when drastically removing sulfur content in fuel – either via scrubbers or VLSFO.

The scrubber payout period remains between two to three years, according to analysis from S&P Global, as the scrubber technology remains a key component to meeting the IMO's 2030 milestone.

The current global fleet fitted with scrubbers, including all types of commercial vessels, stands around 4,500, according to analysis from S&P Global. For dry bulk ships specifically, the scrubber-fitted fleet stands at 1,578 ships.

"Companies are eager to use these low carbon fuels when they become available for sustainable use, but SOx [sulfur oxides] remain a key current concern," S&P Global said in its March 3 analytics Dry Bulk Freight Market Forecast.

Consequently, by Jan. 1, 2030, the number of installed scrubbers across all ship types could pass the 6,000 unit mark, according to analysis from S&P Global.

"If we don't see penetration of clean alternative fuels, we believe scrubber usage near 7,000 would cover the shortfall even though scrubbers only eliminate SOx and not CO2 emissions," S&P Global said in its forecast. "This will increase the HSFO bunker demand into 2030."

"Until cleaner fuels gather momentum and are widely implemented, HSFO and scrubber demand will remain supported," a second broker said.