As the global shipping industry is still pondering on the latest decision by the IMO’s Marine Environment Protection Committee (MEPC) , ship owners have started carving out their strategy in order to gain compliance with the latest rules. Much will depend on available technologies to get there, i.e. LNG Fuels, Scrubbers, or burn compliant fuels, as well as each owner’s fleet age profile, as older vessels might be hard to justify new investments in expensive technologies. It’s worth remembering that MEPC convened to set the implementation date to reduce the global sulphur content of bunker fuels at 0.5% from 2020, down from 3.5% (outside existing emission control areas) today. Much debate surrounded whether implementation should be deferred to 2025 in order to give the refining sector more time to adjust. However, the report commissioned by the IMO found that the refining sector would be capable of delivering sufficient quantities of low sulphur fuel by 2020, despite many industry participants claiming the contrary.
So what are the implications? According to the latest weekly report from shipbroker Gibson, “shipowners now have a choice: install abatement technology (scrubbers), invest in new engines to burn alternative fuels (LNG) or burn compliant fuels (e.g. 0.5% Marine Gas Oil (MGO). In the longer term, abatement technology and LNG may well become the dominant routes to compliance. Right now, scrubber technology remains in its infancy and the costs are high with some industry bodies suggesting the cost could range from $3-10 million depending the size and type of vessel, as well as the ease of installation. Even if costs do fall over the coming years and the technology improves, such investment on older units will prove hard to recover. For younger units the economics might make more sense, particularly if the differential between high sulphur fuel oil (HSFO) and MGO widens. However, retrofitting scrubbers may not be technically straightforward, given the requirements for additional space and waste collection tanks. Equally operators will face costs associated with disposing of the hazardous waste created during the scrubbing process. LNG remains an interesting option. At present LNG bunkering does not have a wide enough global presence to suit tramp shipping, leading to a chicken and egg situation, which comes first, the LNG fueled ships or the infrastructure to fuel them? However, vessels are being constructed with easy conversion to LNG in mind, which appears to be a sensible option, giving owners the flexibility to convert to the fuel when the logistical, economical and technical issues are resolved. For many operators, burning lower sulphur fuels may be the most logical option, particularly for ships with limited trading life left, where recovering the cost of investment may prove tricky”, said Gibson.
The shipbroker added that “looking beyond the direct impact on shipping, it is important to consider the implications for the refining sector. Current estimates suggest that marine fuel demand stands at 4 million b/d, even if it is assumed that just half of that demand is transferred across to MGO, the refining sector may still struggle to cope. Such a shift will require investment in desulpherising and coking capacity to produce the necessary volumes of compliant fuels with a separate report commissioned by BIMCO doubting such capacity will be brought online in time. Such increased demand will undoubtedly tighten the distillate market, increasing fuel prices and in particular the spread between HFSO and MGO, which could shift the focus in favour of abatement technology. A shift towards cleaner fuels may equally increase demand for sweeter crudes which produce lower sulphur fuels, impacting upon crude trade flows”, Gibson noted.
According to the Gibson, “for operators, whilst the cost of compliance may be high, they may ultimately benefit in the long term from higher scrapping levels. On top of lower sulphur limits, the introduction of the ballast water management convention is also likely to strengthen the case for scrapping which will help tip the supply/demand balance into the owners’ favour. Whilst scrapping is likely to be higher, the risk of overinvestment in new, compliant tonnage remains, and just how supportive such regulations are for freight rates largely depends on building activity over the coming years”, the shipbroker concluded.
Meanwhile, in the crude tanker market this week, Gibson said that “busy for VLCCs, as many Owners had anticipated last week. Their readiness to respond, and the consequent momentum, combined to push rates higher and reestablish close to ws 70 to the East and ws 40 to the West. November volumes aren’t expected to be quite as high as record October needs however, and the likelihood of any further significant move is slim, but equally, Charterers will find it hard to force a u-turn over the coming period. Suezmaxes maintained a reasonably solid front, but demand never got them to the point of critical mass and rates ended largely unchanged at up to 77.5 East and high ws 30’s to the West. Some hopes of improvement from that into next week. Aframaxes eased slightly to 80,000 by ws 90 to Singapore and won’t strengthen much from that unless Charterers go shopping in numbers next week”, the shipbroker concluded.
Source: Nikos Roussanoglou, Hellenic Shipping News Worldwide