Retail & Consumers : Focus on cruise operators : the challenge of the IMO 2020 rules

The cruise market is enjoying strong growth, at a rate of 4% to 5% per year, boosted by the development of new capacity, a still low penetration rate in the holiday market, and an attractive price-quality ratio compared with other types of holidays. The implementation of the MARPOL rules (Appendix VI) laid down by the International Maritime Organization (IMO) will drastically change shipping and cruise markets from January 2020. The main measure imposes a reduction in sulphur emissions from 3.5% to 0.5%. Some market participants are still not convinced that Appendix VI actually will be implemented at that time. Accordingly, futures contracts do not completely reflect the effect of the application of IMO 2020 on the various fuel prices. This new constraint leaves cruise operators with three options: 1/ using a less-polluting but more expensive fuel (MGO or ULSFO), 2/ using emission filtration systems or scrubbers, which eliminate a substantial part of the sulphurs and particles while still making it possible to burn high sulphur fuel oil (HSFO), 3/ increasing the use of liquefied natural gas, which is rather limited to new ships. The cruise operators, the merchant fleet as well as the refiners were caught off guard by this development and will not have the time to adjust completely to the new market situation. These rules are likely to result in strong demand for MGO and ULSFO from 2020 and a decline in demand for HSFO, with a quite marked widening of the HSFO/MGO spread (probably $450 versus $290 currently). The adjustment period could last two years. The option favoured by the cruise operators is to install scrubbers enabling them to use the least expensive fuel, HSFO. However, it will not be possible to completely equip the entire fleet before 2020, and the improvement in margins obtained thanks to scrubbers will probably be partially offset by MGO consumption in the rest of the fleet. For competitive reasons, it seems unlikely at this stage that the additional margin gained thanks to scrubbers can be reinvested in selling prices. The current trend is more towards a maximisation of margins and cash flows, which could eventually (2021) have a positive impact on the ratings of the large players in this sector.