Sulphur market trade flows have begun shifting in some regions to accommodate falling refinery-based sulphur output from new IMO 2020 regulations.
Prices in the European and US refinery-reliant sulphur markets have been most affected so far, with supply under pressure from refiners switching to processing sweeter, lower sulphur-content crudes. Sulphur freight rates firmed during the start of 2020 from rising marine fuel prices as well as premiums charged by vessel owners to cover the cost of various upgrades.
But for the moment, IMO 2020’s overall impact on the global sulphur market has been sparing. Uncertainty about this new regulation is now subsiding and new pressures are beginning to capture the market, not least the escalating threat from Covid-19.
IMO 2020 regulations and early expectations
Initial expectations were for IMO 2020 regulations – which limit the sulphur content in marine fuels to 0.5pc from 3.5pc – to increase global sulphur supply by upwards of 5mn t/yr. This boost was based on assumptions that refiners would largely upgrade their desulphurisation and sulphur recovery equipment in order to comply, allowing more sulphur to be stripped through crude processing operations for onward trade.
But the opposite has largely been occurring. Most refiners have only made smaller upgrades to their equipment, which simply allow them to process sweeter crudes. This has reduced the overall quantity of available refinery-based sulphur supply, especially in refinery-reliant sulphur markets such as Europe and the US.
IMO 2020 and west Europe’s sulphur market
In west Europe, refineries are relatively older and simpler compared with newer and more complex challengers in the Mideast Gulf and Asia, so sweet crude processing has been widely adopted as the most cost-effective method of complying.
But this move to sweeter crudes in west Europe has come in hand with additional sulphur supply pressures in the region, including depleting gas-based sulphur reserves in Germany, and a series of unplanned refinery outages across 2019.
As a result, sulphur priced on a cfr Benelux basis – the main index for sulphur in west Europe – has become the most expensive in the world, trending flat-to-firm in 2019 amid softening prices globally. Some suppliers in west Europe are continuing to demand this premium in order to sustain imports of additional cargoes from non-traditional overseas markets.
IMO 2020, the US sulphur market and Covid-19
In the US, new IMO 2020 rules coincided with other sulphur limiting developments in the region. Not least the sharp drops in heavy, sulphur-rich crudes from Venezuela because of sanctions, or the continuing move toward more shale oil processing in the US – a fuel source with a naturally low sulphur content.
Alongside this, additional pressure is now coming from the escalating coronavirus pandemic, which is forcing refiners in both the US and in Europe to slash run rates amid slowing demand for oil products.
As recently as March 2020, US market participants were reporting tighter sulphur inventories at Gulf coast ports, with some already mentioning difficulties in gathering enough product to meet current customer commitments.
Nevertheless, US sulphur prices are far less affected from tighter supply than west Europe’s, mainly because the US market benefits from being more globally integrated and is better placed to secure imports of various forms of sulphur from large gas-based producing hubs in the Middle East, Canada and the FSU.
Gas-based sulphur supply is unaffected by IMO 2020 regulations, as gas processing does not produce marine fuels.
IMO and the global sulphur freight market
Freight rates for dry bulk sulphur cargoes firmed to record highs during the run up to 1 January 2020, as demand spiked for IMO compliant low-sulphur fuel oils (LSFO) amid low global supply and increasing market uncertainty.
Dry bulk rates for sulphur cargoes firmed by $6/t for Middle East to China routes between June 2019 and January 2020 – marking a new high for that route at $22-26/t. The fob markets absorbed most of this additional cost, eroding margins for traders in the process, amid weaker global spot sulphur demand.
But the freight market has since corrected. Refinery economics are rebalancing in favour of LSFO production, and the increasing supply has now helped lower rates for dry bulk routes back to pre-June 2019 levels – currently at £16-20/t for Middle East to China routes.
IMO 2020 and future sulphur market expectations
Reductions in regional sulphur supply from IMO 2020 will persist until new incentives arise for affected refiners to increase output. But global supply is still likely to increase by 7.2mn t this year, from new capacity boosting projects in the Middle East and Asia, which should offset some of the tightness from IMO 2020.
With long-term supply increasing, the IMO 2020 related reductions could help to keep prices on a firmer footing for the time being, notwithstanding downward pressures from weaker fertilizer-sector demand on the year, or indeed the uncertain impact of the coronavirus pandemic.