In 2020, new regulations come in to force from the International Maritime Organisation (IMO 2020) aiming to dramatically reduce sulphur emissions in shipping. Specifically, fuel sulphur content will have to reduce from a maximum of 3.5% currently, to just 0.5% by 1st January 2020.

To conform to these new requirements ships can either switch to more expensive low sulphur fuel oil available only from complex refineries, or retrofit ’scrubbers’ to ‘clean’ the fuel whilst on board. Retrofitting scrubbers is costly and, in addition, involves dry dock expenses and lost revenue from ships being out of the water.

Implications are significant for shipping, refining and shipbuilding companies. Simplistically, container shippers’ near term fuel costs may increase considerably and for refiners, where the industry is not yet ready to produce enough compliant fuel, spreads will likely widen for complex product. For shipbuilders, scrappage rates of older vessels should increase, bringing some return of demand for new boats and ultimately, in the longer term, a better demand/supply balance overall.

Conversations with shipping industry experts also highlight two important points:

Firstly, compliance with IMO 2020 is expected to be rigorously enforced with very significant fines. The need and benefits of enforcement are pretty clear -HSBC estimate that one container vessel consuming 80 tons a day of dirty fuel oil (HSFO) emits the equivalent in sulphur oxides (SOx) of 46 million light-duty vehicles running on Euro VI diesel engines.

Secondly, whilst IMO 2020 comes into force in just 17 months, only some 5% of the global fleet have been estimated to currently have scrubbers fitted. Global dry dock capacity would be hard pressed to materially improve that number in time, even were it not for the current stand-off between ship owners and operators as to exactly whose responsibility (i.e. cost) fitting a scrubber is!

In India, Reliance Industries is a well-placed conglomerate to benefit from this theme given it is arguably the largest complex refiner in Asia. Refining is a meaningful activity for this diversified group as it accounts for circa 60% of total sales and operating income. Elsewhere in its telecom and digital businesses, recent results showed Jio finally gaining critical mass in mobile telco subscribers and its retail business growing very strongly in a market where the penetration of organized retail is still very low.


Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.

About the author

Euan Weir is an investment manager in the Equities team with responsibility for Asia. He joined us in 2015 from HSBC, where he was a Director of Asian Research Sales. Prior to that, Euan was Head of Asian Research Marketing at Merrill Lynch in Hong Kong and was an analyst at Merrill Lynch, Smith New Court and Crosby Securities. Euan studied Land Economy at Aberdeen University and has 26 years’ industry experience*.

*As at 30 June 2018.

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