Ship Owners Show Hands Amid Sulphur Shakedown

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An avalanche of announcements in the past month has cast light, finally, on the post-2020 sulphur compliance options of some important ship owners.

Fuel bills set to rise

A shakedown is defined as ‘a dramatic change’ or ‘a test of a new product’, the word certainly applies to IMO’s impending sulphur rules. There can be no doubt in the seismic nature of the shift, or that it is requires owners to test new ways of operating.

With global shipping fuel bills set to rise by US$60 billion in 2020 (according to analysts including Wood Mackenzie and Platts), owners might be forgiven for thinking the imminent changes represent a shakedown in a third sense too – although exactly who is doing the extorting is a subject for debate.

Views on Sulphur compliance

At last month’s SMM trade fair, a sense of frustration was palpable among a supplier community waiting for ship owners to make their compliance choices, The owners were heard describing vicariously as lemmings, sheep and ostriches.

However, it seems that the Hamburg marine technology fair marked something of a turning point. In the remaining weeks of September some of the world’s biggest container, bulk and tanker operators have come out with their views on sulphur compliance.

Compliance choice

There have been few surprises, and little expectations regarding the proportion of the global fleet that will rely on each compliance option – very low sulphur fuel oil is still likely to be the choice for well over 90% of ships, while scrubbers (despite a late surge) and alternative fuels such as LNG will remain niche.

According to Clarkson Research, over 25% of the orderbook by tonnage is confirmed with a scrubber, although under 3% of the existing fleet have them installed. Adoption of LNG as a fuel has been more cautious, representing 11% of the orderbook by capacity and less than 3% of the fleet (excluding ‘LNG ready’ ships).

That leaves, by Clarkson’s estimation, some 96% of the global fleet opting for low-sulphur fuel oil.That is certainly the preferred method for the world’s major container liners. Maersk, MSC, CMA CGM, Ocean Network Express, OOCL and many more have made public statements that they will be predominantly using compliant fuel oil.

Few curveballs

Maersk, one of the early opponents of scrubbers, is investing in a ‘limited number’ of units so that it can stay familiar with the technology. CMA CGM, having invested in nine LNG-fuelled ultra-large containerships (as well as buying Finnish LNG-powered container operator Containerships), made little of what it had hailed as a landmark investment. But container liners’ choices have generally met expectations.

Open discussion

What has emerged from container operators is a relatively open discussion of the costs associated with sulphur compliance. Maersk and MSC each put the extra cost – of fuel and associated changes to their vessels – at over US$2 billion a year. French liner CMA CGM did not provide a total value but said that it has calculated costs at around US$160 per teu.

That is a very rough average based on how much fuel will be used on each of the major trade lanes, but it gives good idea about the scale of the impact.

All three carriers have reported that they will update – or in the case of Maersk, have already updated – bunker adjustment factors (BAFs) to cover the cost of compliance.

Reaction to new BAFs

Shippers have already reacted furiously to the new BAFs. But, as Andy Lane, a partner at consultancy Container Transport International, explains, BAFs are needed to enable liners to recover their costs effectively.

Can oil price be influenced?

Andy Lane in a report said, “All lines will continue to compete on costs as the industry is well commoditised. So, both the basic sea-freight and the BAFs will be hard negotiated by shippers. Unless the lines can achieve a reasonable cost recovery, it should not be unexpected that another bankruptcy will ensue, and that is not good for anyone”.

Fuel costs represent 20-25% of a ship operator’s total spend, second only after terminal handling. Since the advent of massive over-capacity in 2008 and with constant down-pressure on freight rates, ship operators have dramatically reduced fuel consumption, be it through slow steaming, more economical engines, derating, hull design or bulbous bow modifications. But they cannot influence the oil price, with bunker costs swinging wildly over the ensuing decade between US$170 and US$720 per tonne.

Cost recovery

He also said, “The new wave of BAF announcements seeks to address these issues by making the cost recovery more relevant. They need to prepare for the low-sulphur environment and the total additional cost estimated by Maersk is around US$2 billion per year against expected EBIT of maybe US$300m in 2018 (with a strong tail wind through the fourth quarter), that needs to be paid for somehow.”

Maersk to ensure full compliance

Maersk is ahead of the game when it comes to securing its low-sulphur bunker supply, as its recent investments in Rotterdam reveal. The company has signed an agreement with Royal Vopak to create a 0.5% sulphur bunkering facility at the port to aid future compliance.

The facility, at Vopak Terminal Europoort, will allow A.P. Moller – Maersk to safely blend, store and handle different fuel types to ensure full compliance with the 0.5% sulphur cap.

Availability and supply chain assurance

Niels Henrik Lindegaard, head of Maersk Oil Trading said, “We trust that this initiative will put to rest some of the concerns the industry has on fuel availability as well as secure our continued competitiveness in the market”.

In a meeting in July, IMO recently recognised that there are still some reservations and challenges relating to fuel handling and compatibility around the forthcoming sulphur cap. As an anchor tenant in the modified facilities, the agreement will enable Maersk, as well as other interested third parties, to supply vessels trading with and inside Europe with sulphur compliant fuel. It will also allow the operator more supply chain assurance looking at both quality and quantity of the compliant fuel.

Implementation Plan

For other operators without the scale and leverage of Maersk, the advice is simple, says the International Chamber of Shipping (ICS). Ship owners should order compliant fuel early – as early as mid-2019 – and begin preparing their ship implementation plans.

The call to action from ICS came as the organisation launched its guidance on implementation planning. Such planning, the organisation argues, will not just help to address the many challenges associated with sulphur compliance, but would also act as a show of good faith that owners were making every effort to comply.

What if safe fuel is unavailable?

“The need to demonstrate good faith could be particularly important in the event that safe and compliant fuels are unavailable in some ports during the initial weeks of implementation” says Guy Platten, secretary general, ICS.

“IMO has provisionally agreed that Port State Control authorities may take into account the ship’s implementation plan when verifying compliance with the sulphur limit.”

Scrubber installation at sea

While many container lines are opting for compliant fuel, in recent weeks some of the operators of the biggest bulk carriers and tankers have revealed scrubber orders. Orders of note include Star Bulk, which reported that it will carry out substantial amounts of retrofitting work for some scrubber installations at sea, reducing off-hire time by 50-60%.

The company announced that it will fit scrubbers across its fleet (a total of 111 vessels on a fully delivered basis) before 2020. It conducted the first scrubber installation at sea in August and noted that the procedure can be applied to around 35% of its planned installations.

Capacity squeeze

With multiple owners planning installations of scrubbers, pressure is on to secure both fabrication and installation capacity at shipyards. Scrubber supplier Pacific Green Maritime has launched a pricing concept that allows customers to hedge against the increasing cost of these slots.

Neil Carmichael, CEO, Pacific Green, says: “The Fleet Management Pricing Agreement enables charterers and ship owners maximum flexibility as they can commit on the quantity of vessels but have flexibility to specify the exact ships much later with the substantial benefit of locking in advantageous pricing now.”

Pacific Green will reset the pricing curve (based on ship emissions) every 60 days to reflect increasing capacity constraints in both manufacturing and shipyard space as demand for scrubbers increases towards 2020. The curve was reset on 1 September 2018 and every 60 days thereafter.

The two factors in the complex web of scrubber installations are Price and availability. The ship owners will have to navigate as they select and then procure their sulphur compliance options. With just months to go, those who have yet to make their choices can expect both price and availability to dominate discussions.

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Source: The Motorship

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