As the shipping industry switches to cleaner fuel from Jan. 1., the demand for diesel is expected to rise, benefiting Indian refiners.
The International Maritime Organization's new standards mandate shipping vessels to use fuel oil—a residue of petrol, diesel and jet fuel—with a sulfur content of less than 0.5 percent compared to the existing 3.5 percent as it aims to curb pollution. The cleaner alternatives are marine gasoil or diesel.
The ships also have the option to install an exhaust gas cleaning system known as scrubbers—that removes the particulate matter from exhaust gasses. But that requires a one-time capex and is constrained by limited installation capacity of scrubbers.
As many as 3,768 scrubbers have either been installed or orders have been placed, according to Antique Stock Broking, and is expected to account for around 16 percent of the high sulphur fuel oil demand globally. That would increase demand for diesel, a low-sulphur fuel.
The shift will be beneficial for Indian refiners with diesel contributing 43.4 percent of their combined output compared to 3.6 percent fuel oil, according to Ministry of Petroleum and Natural Gas.
The increased demand for diesel, however, is yet to reflect on the Singapore gross refining margins. The Asian benchmark, on average, remained negative this month, probably for the first time ever. Singapore gross refining margins averaged at negative $0.2 per barrel in December against $1 per barrel in the previous month, according to data compiled by BloombergQuint. That's because of a sharp decline in margins of high sulphur fuel oil. Moreover, the much-anticipated support from diesel didn't materialise, on the back of a slowing global economy and higher supply from refiners.
However, if the demand for diesel rises, Indian refiners will be able to improve their margins. The margin of Indian refiners could rise by 5 to 20 percent in the FY21, according to Kotak Securities, for every $1 per barrel increase in gross refining margins.
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