Making Waves #2: Shipping needs to go green to earn some green
Bigger Fish To Fry ??
Though it was November (2019), temperatures remained warm at night. I washed down my mouthful of grilled fish with a large sip of wine, a crispy floral white from Crete. I was sitting in a downtown restaurant in Athens, surrounded by an eclectic group of shipowners, talking about the upcoming IMO 2020 regulations. Put together they managed a total of 11 ships, including tankers, dry bulk vessels and container ships. Whilst empty dishes piled up, the bottles of wine merrily slipped down, and my hosts proved their reputation for hospitality, the mood was somewhat sombre. One of them lamented: “I can’t believe I have spent a multiple of the scrap value of my ship for an untested piece of equipment…” All of them were faced with the same dilemma: had they made the right decision to become compliant with a new industry fuel rule due to become mandatory in the new year?
Shipping industry emissions are currently estimated at 2.5% of global totals and are projected to increase three-fold by 2050 if left to grow unhindered. The desire to decarbonise the industry has come at a time when shipowners are struggling to justify large capital expenditures due to a low earnings environment and when each decision has to be carefully weighed.
"To fight [their] way out, charterers and ship owners are going to have to put on their green gloves [...]"
We are at a tipping point in the shipping industry. The challenges of chronic oversupply of tonnage since the beginning of the century and an outlook for oil demand which looks increasingly unfavourable, have battered the industry into the corner of the ring. To fight its way out, charterers and ship owners are going to have to put on their green gloves, throw a left hook carrying sustainable cargoes and finish the job with a carbon-free emissions fuelled uppercut.
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This month we explore how crude tanker markets ended up in such shambles and how a sustainable future can help alleviate some of the pressure.
Cartoon of the month: “Downhill is the new black” - Courtesy of Sheridan Hart
?Monthly News Spotlight: Tanker Markets Reach All-Time Lows, Again ??
“Oil Tanker Market in Rougher Seas”; “Unemployed oil tankers about to get scrapped on a beach”; “Poor outlook for oil tankers”, etc. This seemingly endless list of depressing headlines says much about the current state of the tanker markets. If you’re a shipowner things aren’t going great. In last month’s edition we looked at the importance of cargoes in the market to spur tanker demand. Saudi Arabia started the year with cuts to oil output and demand for floating storage is down. Both combined have impacted demand for tanker overall and this is clearly reflected in the earnings graph below.
Global VLCC average earnings calculated using price assessments from Argus Media (a price reporting agency)?
The last two years have made us witness to incredible bouts of volatility. In the above table I have averaged the cost of transporting a cargo along the main trading routes for Very Large Crude Carriers (VLCCs), capable of carrying close to 2 million barrels of crude oil in a single voyage. VLCCs were once affectionately referred to as Very Large Cash Cows but nowadays this period is but firmly a thing of the past. Notwithstanding the period between September 2019 and May 2020, VLCC earnings have hovered around break-even. And whilst volatility can be seen as a boon for tanker markets, we cannot expect Black Swan events (i.e. an extremely rare event with severe consequences) to become the norm nor would wish for that to be the case. With earnings at such low-levels, it matters which fuel you use. And that brings scrubbers back into the conversation.
Shipping Fuel Economics 101 ??
The International Maritime Organisation represents the United Nations for the shipping world. As of January 1, 2020, a regulation known as IMO 2020 came into effect, in line with the UN’s climate action goals. Its motto: “cleaner air for cleaner shipping”.
The regulation limited the amount of sulphur content in marine fuels to 0.5%, as opposed to the previous industry standard of 3.5%. The decision caused considerable amounts of anguish within the community as it forced them to make a choice. On the one hand they could comply and see their fuel costs increase considerably as the new fuel was always going to be more expensive than the previous one for reasons of availability as well as ‘better quality’. On the other it could benefit from installing a scrubber, in basic terms a sieve that could filter out the sulphur, and allow the owner to continue using the old ‘dirtier’ fuel.
"A second scrubber boom is already the talk of the town [...]"
Scrubbers did not come cheap. If the ship was being built, adding it would cost upwards of $3m and if having to retrofit it, meaning adding it to an existing ship, the cost of the drydock, time out of the market and technical modifications could bring the cost near $10m. The way the maths worked, shipowners reckoned they would recoup their investment by paying less for their fuel than their competition without scrubbers and in the long-term be more competitive. The global pandemic disrupted everyone’s plans and with oil prices dropping, fuel oil prices followed suit meaning throughout much of 2020, planned savings were not realised. The average spread between the fuel types for the year was less than $100/mt, or half what was expected by analysts.
Fast forward to today and that spread is widening again, with a second scrubber boom already the talk of the town. And with earnings where they stand, at record low levels, one could really do with the extra savings on their fuel costs, helping provide support to this theory. The real question remains whether scrubbers risk becoming obsolete sooner rather than later. This could happen as a result of the next IMO regulation or the push towards the decarbonisation of the industry that has been all but accelerated dramatically in the past year.
To Summarise ??
Earnings for crude oil tankers are scraping the bottom of the barrel. This situation has sadly become the norm over the last few years. Bar short bouts of record volatility, spurred by once in a generation events, it has become harder than ever to be profitable in tanker shipping. As the cost side of the equation, specifically the cost of fuel, comes back into focus, so does the role of scrubbers and the possible competitive advantage. The question remains - isn’t there enough of an incentive to focus on long-term solutions for a cleaner industry instead of short term ones?
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About Arthur Richier
Arthur is the Senior Freight Analyst for Vortexa based in London. Prior to this he was on the freight pricing desk at S&P Global Platts, covering dirty and clean tanker markets.
As part of the conversation around freight markets, and their impact from energy markets to our everyday lives, he has contributed to Bloomberg, TradeWinds, Tanker Shipping & Trade (as part of Riviera Maritime Media), Ship & Bunker, The Business Times (Singapore), The Houston Chronicle and Gulf News among others.
In his spare time he sits on the board of the Shipping Professional Network of London, where he aims to bring together young professionals from all aspects of the shipping industry to network, socialise and learn more about the industry he proudly forms part of.