Ships Vie With Japan Utilities as Fuel Supplies Dwindle

Oil refiners’ investment in more-efficient refinery facilities is leaving shipping lines competing with Japanese power producers for a fuel no one wants to make.
Refiners are upgrading plants to cut output of fuel oil, a byproduct of making gasoline and diesel, as it sells for less than the price of crude. Shipping lines are seeking more of the product -- known in the industry as bunker -- to fuel expanding fleets, while Japanese electric companies are speeding purchases as they close nuclear plants for safety checks following 2011’s tsunami.
“We have a bunker market which is still growing, and we have no fuel,” said Fereidun Fesharaki, chairman of Singapore-based Facts Global Energy Inc. “Everyone is destroying the capability for fuel-oil production.”
Japan is increasing fuel-oil purchases as power companies burn more of the substance to offset lost nuclear capacity. The country boosted imports 19 percent, to 799,010 kiloliters, in January, the highest since Bloomberg began tracking the data in 2001. Demand from local power plants may rise 7.1 percent this year, according to Vienna, Austria-based JBC Energdewsy GmbH.
The crunch means bunker has averaged 25 percent higher so far this year in Singapore trading than a year earlier, more than the 17 percent rise for Dubai crude. Container lines are unable to pass the increase to customers because of overcapacity, leaving AP Moeller-Maersk A/S’s cargo-box unit, the world’s largest, forecasting a 2012 loss, and Orient Overseas (International) Ltd. predicting a “difficult” year.
“Shipping lines are in a very tight squeeze,” said Um Kyung A, a Seoul-based Shinyoung Securities Co. analyst. “Even with the recent rate increases, they’re not going to earn enough to cover costs.”
Bunker-fuel prices may reach $800 per metric ton this year, 11 percent more than last year’s high, amid a possible supply shortage, she said. Asian bunker demand may grow 3.4 percent this year, JBC Energy GmbH said in a March 8 report. It didn’t give a production forecast.
The price of 380-centistoke bunker fuel has traded at an average discount of 51 cents a barrel to Dubai crude this year in Singapore. Gasoline has traded at a premium of $12. (Bloomberg)
Container lines are more affected by fuel prices than operators of dry-bulk vessels and tankers, as they run scheduled services, which take place whatever the level of demand. Other vessels generally only operate when they have cargo. They also travel at slower and more fuel-efficient speeds, and customers are more likely to be contracted to pay for fuel.
Tighter environmental regulations have also increased fuel costs, as bunker has had to contain less sulfur since January, said Basheer Ahmed Sayeed, chief executive officer of fuel trader Chemoil Adani (Singapore) Pte. Meeting that requirement means fuel oil has to be blended with more expensive and cleaner types of refined oil, he said.
“Already the shipping industry is in such a tight spot, and this is an added pressure,” he said. “As a bunker supplier, whether to give credit lines to shippers is a big question.”
Fuel oil is among residual fuels which are the heaviest and most-polluting products created from refining crude. Refiners break down crude into four main types of products -- liquefied petroleum gas; light fuels, such as gasoline; middle distillates including diesel; and residual fuels. The residuals also include bitumen and asphalt.