Carbon Countdown

2020 Weighing Heavy on Carrier Minds

It’s real, it’s happening, and the countdown is on.

Any hopes that there might be a last-minute reprieve or extended grace period offered for the International Maritime Organization’s incoming global ruling on maximum sulfur content in marine fuels have disappeared in a puff of non-polluting smoke.

With less than six months to go until the IMO regulation limiting sulfur content in marine fuels to 0.5 percent mass-by-mass, multipurpose operators are scrambling to set their own unique solution to the problem as they look to share the burden of cost – and confusion – with project cargo owners needing their services.

Container lines, with their easier-to-bunker fixed schedules, have been making their voices heard, especially in the scrubbers vs. low-sulfur fuel use debate. Ove Meyer, managing director of Zeaborn, said that it’s time for MPV operators to step up and escalate their own discussions on IMO 2020. Zeaborn has already held meetings with a plethora of engineering, procurement and construction companies worldwide to discuss and detail the impact of 2020.

Shared Responsibility
Those cargo owners are happy to share the burden … but only to an extent. Matthieu Jeannin, global category manager for logistics and warehousing activities at SCM, told Breakbulk that as long as fuel-related surcharges are identifiable, justified and invoiced in the same way to all customers then SCM would pay. However, a lack of transparency in some “all-in” ocean freight bookings – which do not differentiate between freight and surcharges – could breed distrust on the validity of fuel surcharges.

To protect itself SCM has negotiated a cap on the level of fuel surcharges. In its Frame Agreement, it states that surcharges will remain the same on an acceptable range of plus-or-minus 5 percent from initial negotiated rates. Above or below this level they could be back-charged.

Wallenius Wilhelmsen reports that the majority of its cargo owners have been supportive of the move to reduce sulfur emissions. However, “that is not to say that they are happy to bear the cost,” said Roger Strevens, vice president of global sustainability at Wallenius Wilhelmsen. “The IMO compliance cost is just part of the offer a carrier makes to a shipper, and it therefore falls within the scope of the normal commercial negotiations.”

But shippers need to be on board. If not, they will undoubtedly be shocked by the post-Jan. 1 freight rates that will be quoted for sea shipments. Zeaborn’s Meyer runs through the math. “If you take a standard ship, let’s say a 12,000 deadweight-tonne MPV E or F type, the fuel cost is about 35 percent to 40 percent of the voyage expenses. Assuming that low-sulfur is close to the cost of marine gasoil, fuel costs will increase by about 80+ percent, leading to an increase of freight rates just from fuel cost by about 35 percent.”

Compounding this is an anticipated decrease in available tonnage in the fourth quarter of 2019 and the first quarter of 2020 onwards. This will lead to increased charter rates as supply decreases, potentially to the tune of 15 percent to 25 percent.

“Taking all of these factors into consideration, there could be an increase in freight rates of 50+ percent, purely driven by the 2020 regulations – and this increase is driven by cost only!” Meyer said.

He added that this cost increase is a fact, and the market has to openly deal with it, in partnership and with open books: “We don’t want EPCs to be hit by overnight increases in freight rates.”

Pricing Disparity
That there will be a price variance between the high-sulfur fuel oil and the very-low-sulfur fuel oil is largely undisputed. The actual spread, though, is a topic of hot debate as the market edges closer to the Jan. 1 deadline. While unkeen to put a price on the spread, Peter Zachariassen, global director of Bunker One, pitched it as “large,” adding that it will gradually decrease over the coming years, as the industry adds more vessels with scrubbers – air pollution control devices that remove some particulates and/or gases from ships’ exhausts – increasing demand for the high-sulfur fuel oil that they will continue to use.

This uncertainty makes quoting for future projects challenging. “Although we have indications, it still is a big risk quoting for future business that extends beyond 2020,” noted Kyriacos Panayides, managing director of AAL Shipping.

Strevens confirmed that Wallenius Wilhelmsen is “prepared to deal with a wide variation in pricing.” Its approach to compliance is made up of three parts:
• Use of low-sulfur fuels on some vessels, and scrubbers and use of heavy fuel oil on others.
• Hedging of the forward price spread between high sulfur fuel oil and marine gasoil for the last quarter of 2019 for 100 percent of its fuel volumes.
• Engaging in discussions with customers to advise them of the regulatory changes that are afoot and to ensure that the same are reflected in its commercial agreements.

“Since the most cost-effective compliance solution is vessel specific, that approach allows us to achieve the best outcome on a per-vessel basis and, by extension, for the entire fleet,” he said.

But there is an upside to the pricing picture. With increasingly bad press, scrubbers are seen as only part of the solution to meet the incoming regulations for the global fleet. But while an estimated 20 percent of the world’s container fleet is expected to have scrubbers fitted by the end of 2020, the MPV fleet is largely shunning them in favor of switching to burning low-sulfur fuel oil. This herd mentality will bring about the unanticipated benefit of a level pricing playing field for MPV operators and those that employ MPVs for project cargo moves.

AAL Shipping’s Panayides told Breakbulk that scrubbers will not be installed on AAL’s ships as they are “not beneficial for our types of ships.” Meyer explained that there are significant technical hurdles for installing scrubbers, especially on the smaller ships. “Also, on the smaller units and the older ships – and here I’m talking about the assets that are 12+ years, the ratio of scrubber investment, asset value and remaining lifecycle is simply not there,” he added. Even if that ratio could be balanced, MPV operators are hardly flush with cash and are therefore unable to make that level of investment. There is the added concern that the high-sulfur fuel oil necessary for powering scrubber-fitted ships may not be available in some of the smaller ports which are frequented by the MPV fleet.

Supply Questions
But while the shunning of scrubbers might bring fuel pricing parity for MPVs operators, fuel supply remains a large unknown. According to Bunker One research, Asia could face a lack of low-sulfur fuel oil supplies, which could prompt a large increase in distillate demands. This could lead to a decline in the supplied volume in Singapore.

“The geographical differences will play a big role, as some areas are long in product and others short. In those areas where we see a shortage and in many smaller ports, distillates supply will naturally increase and be the main product,” Zachariassen said.

Fuel supply is less of a concern for Wallenius Wilhelmsen. Strevens said that the operator is “confident” that it will have sufficient supplies of compliant fuels for and after Jan. 1, 2020. “That stems from the fact that we have some inherent advantages from the type and size of company we are. As a liner operator, we know where our vessels will be a long time in advance, which means that we can plan our bunkering in advance.” That means that Wallenius Wilhelmsen can consolidate where its ships bunker. That consolidation coupled with the fact that it is a large operator means that it is a major buyer in its bunker ports, “which helps move us to the front of the queue at the fuel pump, so to speak.”

However, Strevens stressed that Wallenius Wilhelmsen is not passively relying on those advantages as the deadline approaches and is maintaining “close and continuous” dialog with its key bunker suppliers. He is sage enough to appreciate that none of its strategies will guarantee sufficient quantity and quality, but he believes that the company is well prepared to deal with what’s on the horizon.

Zeaborn is also leaning on scale to ensure adequate supply. Its ship management arm operates close to 170 ships and has put a taskforce in place to evaluate and analyze its post-Jan. 1 options.

Tramp vs. Liner
Zachariassen dismisses concerns that the overbearing container ship sector will ride roughshod over the smaller MPV sector when it comes to fuel supply. “I don’t think that should create deep concerns,” he said. “All customers are important to a supplier – big and small.”

Indeed, Bunker One is active in niche ports, and is dependent on a broad spectrum of customers. “It goes without saying that we, as a supplier, are also looking for reliable and long-lasting customer relations, just as a customer is looking for reliable and financially stable suppliers.

“[It’s] important to partner up with the right counterparts that can offer not only good price ideas, but also information and technical sparring on product quality,” he added. “We estimate that the immediate focus on product availability and quality will shift to a pricing focus in September 2019 with contract negotiations to start to secure sufficient supply.”

Early movers stand to gain much, Zachariassen said, specifically when it comes to that all-important security of supply. “As a supplier of different 2020 products, we would be very focused on locking in contracts with customers – as this will give us a foundation of building up the supply infrastructure for 2020.” So customers can benefit from security of supply and clearer cost expectations.

AAL confirmed that it will start burning low-sulfur fuel oil in the fourth quarter of 2019. “All the reports are showing a predictable price,” Panayides said, “but history shows that nothing is predictable.”

Looking Beyond 2020
IMO 2020 will unquestionably have a profound impact on the MPV fleet and shipper/operator relationships going forward. But this regulation is just one cog in the wheel to decarbonize shipping, and if the project cargo and breakbulk sectors focus solely on the 2020 deadline they will completely miss the bigger picture.

Emissions from shipping are in the public crosshairs, and with countries like the UK recently announcing its aim of carbon neutrality by 2050, IMO 2020 is just one step on the journey to zero emissions. Speaking at Breakbulk Middle East, Mohamed Zaitoun, founder of Zaitoun Green Shipping and president of the International Maritime Consortium, pointed out that MPV operators cannot continue to operate as they have in the past. “You cannot only look at the IMO; countries can come with their own requirements. The rules will not end in 2020, there will be more rules coming. If you want to stay as a ship operator you have to think about this.”

Ship operators buying an MPV today need to be thinking about the requirements of 2030, not just 2020; retrofitting to solve problems is a solution with a shelf life. “We have to change the model and be proactive,” Zaitoun said. “Define the needs, mitigate the risk and form integrated technical specs prior to ordering new vessels to ensure building efficient and profitable vessels. The current and old newbuilding approach will lead to bad vessels and assets which will lead to negative finance results.”

But back to the here and now – to what is for many the only topic on their minds at the moment, despite Zaitoun’s words of warning – and there is still work to be done.

Bunker One’s Zachariassen offers words of advice for MPV operators still wavering on what to do next: start talking … to suppliers, to traders, to local experts, and to consultants. Spread the net as far as possible so that you can build up an accurate picture of supply security and pricing in regions where your fleet normally trades. Only then can operators create a workable strategy to deal with the game-changer that is IMO 2020 and get on the right path for what will come after that.   

Carly Fields has reported on the shipping industry for the past 19 years, covering bunkers and broking and much in between.