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High Cost Fleet Upgrades to Dominate Shipping Industry in the Years to Come

Ship owners should be prepared for a lengthy and high cost process of constant revamping of the existing fleet of ships, as more and more bans and regulations are being put into force with a view to limiting the industry’s environmental impact. So, while scrubbers and low-sulfur fuels are the main discussion points today, ahead of the IMO 2020 rule, in the future the global agenda will undoubtedly shift towards LNG and other means of decarbonising shipping.

In its latest weekly report, shipbroker Allied Shipbroking said that “nine months till the IMO 2020 regulation goes live and discussions have intensified, with most owners having already taken their strategic decision with regards to scrubber or no-scrubber. Yet, the heated debate over the future viability of scrubbers and fuel alternatives still ranges on. The number of vessels to be equipped with a scrubber system by the end of the year is estimated to be somewhere in the region of around 2,000 to 3,000 vessels, which is but a small share of the global trading fleet”.

According to Mr. Yiannis Vamvakas, Research Analyst with Allied Shipbroking, “these vessels will continue burning HSFO after 1st of January 2020 deadline, looking to recoup their investment and gain from the bunker price spread that will prevail. This spread is expected to rise after 2020, as HSFO prices are likely to drop as around 3 million bpd of demand switches over to the compliant fuels. The current average spread between HSFO 380 and MGO is $250 per metric ton, with estimates expressed that this could even double after 2020. From historical data, we can see that over the last 5 years, the average spread of HSFO and MGO was $190”.

Meanwhile, it is worth pointing out that “over the past 28 years, the average spread of the two fuel types was $150 when Brent prices were below $100 per barrel, and $350 when Brent prices were above 100$ per barrel. The price of the new VLSFO that are gradually being introduced by refineries are expected to range near those of gasoil prices, with the spread looking possible to reach a range of between $350-$450 after 2020. Given that the cost of a scrubber sits somewhere between $2.5 million to $5 million, it is a matter of mathematics if the additional capex can be justified. Through a very simplified example, with an initial capital outlay of $4.5 million and assuming that a vessel operates 250 days, burning 60 tons per day, we can see that in the case of a spread of $100 dollars, the capex is repaid in approximately 3 years, while with a spread near $400, the repayment is made in less than 1 year”, Vamvakas said.

He added that “those on the non-scrubber camp point out that real life calculations are considerably more complicated, with factors such as engine efficiency, operational issues generating extra costs and the cost of handling the extra sludges all playing their part. Adding to this the belief that the spread will not climb to such high levels and that we are unlikely to see the full amount of the fuel cost savings being passed on to the owners at these current freight market conditions and the calculations start to become more marginal”.

According to Allied’s analyst, “going beyond these concerns, owners should bear in mind additional future regulations that could affect their investment plans such as the possibility for the Mediterranean Sea, Australia and the whole of North America being added to the SECA zones (Sulphur limit <0.1%). Beyond this we are also seeing initial discussions for a complete fuel oil ban from the Artic route and talks on the IMO GHG greenhouse gas emissions targets to cut emissions by 50% (compared to 2008) by 2050. Details of these regulations are yet to be defined, though they may lead owners to reconsider more radical solutions such as using LNG as a fuel as well as other hybrid solutions. Of course, all these solutions are highly costly and are still at an infant stage in terms of current port infrastructure and other operational concerns. Yet given where things are going, it looks as though this will not be the last time owners will be called upon to take on such a high cost upgrade in order to comply with the everchanging regulatory requirements brought upon the shipping industry”, Vamvakas concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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