Ship Scrubber Unit (3)--MarinSmart Expert Committee

Costs and benefits of Scrubber

Fuel costs account for a significant portion of the total cost of operating a ship (sometimes more than 50%), and the choice of high priced low sulfur fuel oil can obviously add significantly to the cost burden of shipping companies. In a sense, the benefit of FGD towers is the cost savings from using high sulfur fuel oil (as opposed to compliant low sulfur fuel oil), depending on the price difference between high and low sulfur fuel oil and the fuel consumption of the ship. the larger the price difference between LSFO (low sulfur fuel oil) and HSFO (high sulfur fuel oil), the more the ship owner benefits from installing FGD towers. In other words, for the FGD tower market, the price difference between high and low sulfur oil is the most critical factor in determining whether a shipowner chooses to install a FGD tower. As long as the price difference between high and low sulfur?oil exceeds US$50,the shipowner?will have an incentive to install or retrofit a ship with a FGD tower that can benefit the shipowner, and this law has been particularly evident in the market changes of the last two years. By choosing to install?scrubber?towers, ships can continue to use relatively low-cost high-sulfur fuel oil that matches the engine design performance, not only avoiding the need to spend more on new low-sulfur oils that carry more risks (see the discussion of marine fuel oil issues), but also avoiding the huge cost of modifying the ship's engine and its fuel system to use alternative fuels (such as LNG, methanol, etc.). This not only saves costs but also effectively reduces risks.

The spread between Singapore Benchmark 0.5% sulfur marine fuel oil and Singapore 380 CST high sulfur fuel oil rose to $315/ton in January 2020, with cape size vessels with FGD towers earning approximately $12,000 per day more than cape size vessels without FGD towers; the spread averaged $92/ton for the full year 2020 and $112/ton for the full year 2021; On February 4, 2022, the spread had climbed to a 2-year high of $210/ton, a significant improvement in voyage economics.

The information on the internet platform of I-Be Ship & Sea Service shows that?the difference between high and low sulfur oil in Singapore was US$596.50/ton on July 5, 2022, which is close to US$600 and reached a new record high. This further highlights the economics of installing FGD towers, allowing early installers to achieve a very satisfactory return on investment upfront. With the widening price difference between VLSFO and HSFO, FGD towers, which were once a hot topic in 2020, are back and becoming a favorite in the ship market again, with more and more ship owners preferring to install FGD towers to comply with the current challenges of rising fuel costs. It is entirely predictable that investments in ship?scrubber?units will pay off handsomely in the coming years.

The cost of installing?scrubber?devices on existing ships includes three parts: first, the capital expenditure for purchasing and installing?scrubber?devices upfront, which depends on the type of ships and?scrubber?devices; second, the loss of ship time; third, the operating cost due to?scrubber?devices in actual operation, including additional electricity cost, water cost and the cost of chemicals, etc. The cost of retrofitting is difficult to predict due to the complexity of the project and other issues, and the payback period will longer. The cost of installing a?scrubber?unit on a new ship is about half of the cost of retrofitting on an existing ship, so large new ships are basically equipped with?scrubber?units.

Shipowners expect 2-3 weeks for the installation of FGD units, the majority of retrofitted ships spend much longer than expected in the dock, typically more than 4 weeks. Ships equipped with?scrubber?devices also need to conduct equipment tests and commissioning in waters far from the port. In addition, the supply of many raw materials and ancillary equipment have seen price increases, resulting in much higher than expected costs for ship?scrubber?unit retrofitting.

In 019, when investment in?scrubber?towers surged, the industry expected the payback period for VLCCs to be less than two years. At that time, the cost of retrofitting an open FGD tower on an old VLCC was about US$4-4.5 million (the cost of installing it on a new vessel was about 2.5-3 million tons); in terms of revenue, the price difference between 0.1% MGO and 3.5% sulfur content high sulfur fuel oil in Europe in January 2020 as the high and low sulfur spread, this spread was about US$200 per ton (the spread in Singapore is much higher than Europe ), the average daily fuel consumption of a VLCC is about 100 tons.

By calculation, the fuel cost saving of this VLCC is $20,025 per day, and the upfront investment cost can be recovered in 215 days of sailing. In addition, it takes 4 to 6 weeks to refit the ship in the dock, here we take 40 days, and this time cost also needs to be added to the total payback period, which is 255 days.

Although the price difference between high and low sulfur fuel oil still has a strong uncertainty in the future trend, but the higher the engine power (the current exhaust gas treatment capacity of?scrubber?device is up to 72MW), the more fuel the ship consumes, the higher the price difference between high and low sulfur fuel oil, the more cost saving by using high sulfur oil, the shorter the payback period, the better the economy of?scrubber?device will be, and the more ship owners are inclined to install?scrubber?device.

In addition, the payback period of the FGD tower is also related to the operating area of the ship: the longer the ship operates in the emission control area, the shorter the payback period of the FGD device, and the more necessary the ship is to install it.

?Before the implementation of the new 2020 sulfur limit, the consumption of high sulfur fuel oil by ships was about 4 million barrels per day, accounting for more than half of the global demand for high sulfur fuel oil. Therefore the impact of IMO 2020 on the whole high sulfur fuel oil market is undoubtedly huge. At present, there are 3 conversion paths for this 4 million bbl/d of high sulfur marine fuel oil demand: part of the demand will be replaced by low sulfur fuel oil (MGO, low sulfur blending oil), part of the demand will be converted into LNG demand, and the last part of the demand will be retained in ships installed with?scrubber?towers (considering the non-marine sector demand, some high sulfur fuel oil will also be absorbed by power plants and refinery units).

The most commonly accepted means of compliance is the use of low sulfur fuel, but the availability of compliant low sulfur fuel in the market, the uncertainty of the price difference between high and low sulfur oil, and the potential safety issues of using low sulfur oil, many ship owners say they do not want to "put all their eggs in one cage". Therefore, the market for?scrubber?towers still has great potential for growth in the coming years, and the core driver behind this is its economics.

Large HSFO inventories are putting downward pressure on prices, and the high and low sulfur oil spreads in Singapore are much higher than in the US or Europe and may widen further in the future. Expectations of widening bunker spreads are encouraging shipowners to consider ordering FGD units for planned newbuilds, which could continue to fuel a boom in FGD installation projects in shipyards.

According to the current price difference between high and low sulfur oil and the trend judgment, the cost of installing?scrubber?device for new shipbuilding is almost negligible, for large container ships, the payback period of?scrubber?device is less than one year, even for existing ships retrofitting?scrubber?device return on investment is not much longer than new shipbuilding, which proves that the investment in?scrubber?device for new shipbuilding and existing ships is reasonable. Therefore, those large containers are more inclined to install?scrubber?units, and currently more than 30% of the global container fleet has been installed with?scrubber?units to reduce fuel costs, a phenomenon that has driven the growth in demand for high-sulfur fuel oil at major container ports.

According to the information of?MarinSmart?platform, the?share of high sulfur fuel oil in the global marine fuel demand structure may rise from 15% in 2020 to 21% in 2023 and further to 28% in 2030.

With a number of countries and ports issuing bans on the discharge of wastewater from open FGD units, many people became concerned that the application of FGD towers might be affected, and FGD towers were once in a small downturn. However, this downturn did not affect its growth for too long, as the cost savings from FGD towers are considerable. Therefore, faced with the double pressure of strict environmental requirements and increased costs, some ship owners still choose to install FGD units to meet emission requirements.

The only thing?currently preventing shipowners from installing more FGD units in their fleets?is the downtime of waiting in line and installation at shipyards.

For the ship repair industry, shipowners either retrofitting ship exhaust?scrubber?devices, or retrofitting ships for the use of clean energy, have brought new large orders to ship repair yards,?scrubber?conversion projects with high production value, large and medium-sized container ships retrofitted with?scrubber?devices costing $4 million to $5 million, which is the best time for ship repair yard benefits since the financial crisis in 2008.

The new wave of FGD tower conversions has already caused many shipyards to be overwhelmed with business orders and busy dockyards running at full capacity, with multiple ships lined up at each yard waiting to be fitted with FGD units. According to fuel analysts, the investment in?scrubber?towers will reach $16 billion by 2025.

The future of the?scrubber?tower market will be a dynamic process of change, policy, economics and other factors will affect the trajectory of the development of the?scrubber?tower market, so this market deserves our continued attention.