A reduction in the maximum sulfur content permitted in marine bunker fuels from 3.5 percent to 0.5 percent scheduled to begin in 2020 will have unclear effects on international sulfur fundamentals, sources have indicated, prompting many market players to adopt a wait-and-see approach to assessing the policy change’s ultimate impact on the elemental sulfur market.

The reduction in sulfur content, mandated by the International Maritime Organization (IMO) and slated to go into effect on Jan. 1, 2020 — commonly known as IMO 2020 — will have far-reaching impacts on the marine shipping industry.

And while the sulfur industry agrees that IMO 2020 will precipitate a net increase in worldwide sulfur supply, the overall scale and effect of that increase on the market’s supply and demand balance remains nebulous as of October 2019.

Sentiment regarding the impact of IMO 2020 on the elemental sulfur industry has been wide ranging, spanning from expectations of a negligible effect voiced upon the change’s first announcement in 2016, to anxieties regarding a more noticeable supply increase as the mandate draws closer to implementation.

From a supply standpoint, IMO 2020 is expected to prompt an increase in total amounts of sulfur recovered from the world’s oil refineries. Marine freight is responsible for approximately 3.4 million barrels/d of oil consumption, approximately 3-4 percent of worldwide consumption typically pegged at 93-100 million barrels/d.

The move to 0.5 percent sulfur from 3.5 percent equates to an approximate 80 percent decrease in allowable sulfur levels in bunker fuels. The extra sulfur recovered will boost worldwide oil-recovered sulfur production, although estimates of the total amount vary based on a number of factors.

For instance, vessels operating in North American, European, and South China waters have been restricted to the use of low sulfur fuel oil (LSFO) since 2015. The U.S. Energy Information Administration (EIA) noted high sulfur (3.5 percent) marine fuel (HSFO) in use by 58.5 percent of the U.S.-based shipping fleet in 2018.

Furthermore, numerous impediments to the adoption of low-sulfur 0.5 percent bunker fuels are likely to complicate shipping industry adoption. A lack of sulfur recovery unit (SRU) capacity is one major bottleneck SFO production, according to the European Petroleum Refiners Association.

The SRU deficiency, combined with other factors, has created an expected dearth of supply of IMO 2020-compliant bunker fuels, driving prices in that market to an estimated $100-$200/mt above HSFO prices.

Recent increases in high-sulfur bunker fuel pricing, attributed in part to the recent attack on Saudi Aramco refining and oil production capacity (GM Sept. 20, p. 17), briefly reduced that price disparity in recent weeks, sources said, although a speedy recovery timeline announced by Aramco softened HSFO pricing as of Oct. 1.

The global supply of IMO 2020-compliant low sulfur fuel oil (LSFO) is estimated to stand at 1.4 million barrels/d in 2020, according to Hellenic Shipping News, rising to 1.7 million barrels/d in 2024, below the current 3.4 million barrel/d rate of demand.

Other means of complying with the policy exist, however.

Instead of a wholesale switch to LSFO, some shippers are expected to blend high-sulfur 3.5 percent bunker fuel with very-low sulfur distillates already in production in order to hit the 0.5 percent limit.

Still others have installed exhaust scrubbers directly to individual ships, reducing the sulfur content of stack emissions to within permissible levels. Approximately 4,000 ships are expected to be equipped with scrubbers by 2020, Hellenic Shipping News reported, roughly 4.3 percent of the worldwide fleet.

IMO 2020 could also precipitate a smaller-scale switch to nontraditional fuels such as LNG, although that kind of wholesale fuel overhaul would likely be limited to new ship builds.

What percentage of shippers will comply with IMO 2020 by running pure LSFO versus HSFO/ultra-low sulfur blends, or HSFO combined with an exhaust scrubber, remains unclear headed into fourth-quarter 2019.

Market players agree that IMO 2020 will precipitate a net increase in available sulfur supply. Some industry insiders believe additional market factors could moderate the hit to the market.

“In conjunction with our consulting TSI members, we understand that there is going to be a rise in global sulfur supply as a result of IMO 2020 fuel standards,” said Craig Jorgenson, spokesman for international sulfur advocacy group The Sulphur Institute (TSI). “That supply may be offset in new demand; for example, if there is an increasing supply in North America, the demand from elemental sulfur for new mining projects in the Western United States could mitigate some of the uptick in supply.”

“We also understand that supply is likely to be concentrated in three general regions, Europe, the U.S. Gulf Coast, and South Asia,” Jorgenson said. “With (these) locations already key dry bulk shipping hubs in the sulfur market, the new sulfur production will not likely be held captive.”

Others predicted that the supply increase from IMO 2020 could end up compensating for reduced 2019 sulfur outputs, instead of inflating supply.

“The interesting thing … is that sulfur production for 2019 is off by approximately 1 million tons from 2018,” one market player said. “(Many in the industry are) thinking that IMO 2020 may improve sulfur supply in North America to get back to 2018 levels, but it will be regional. (It is) interesting to think that the additional supply that may be created by IMO 2020 may serve to only get us back to more traditional production levels.”

Other changes in the fundamental sulfur landscape, such as increased refinery outputs in China and the Middle East, are more likely to directly affect sulfur pricing, other market sources contended, while surcharges expected to be levied by the shipping industry as compensation for the cost of IMO 2020 compliance could amount to the policy shift’s most immediately visible effect.

Still another subset of the market voiced expectations that IMO 2020 would have a mild overall effect on sulfur pricing, but conceded the policy’s implementation is scheduled to roll out at a particularly inopportune time.

“U.S. sulfur is about to hit price lows not seen in 10 years, and that’s all about global phosphate demand,” said one market player. “I think (IMO 2020) will only be background noise relative to the macro drivers.”