Decarbonizing shipping is like herding cats, and that herd, otherwise generally known as the International Maritime Organization (IMO), unveiled major recent global emission-reduction targets Friday.
From a future freight rate perspective, it was a win for tanker and dry bulker owners. The uncertainty over future regulations that has stymied newbuilding orders was not only kept in place, it was exacerbated.
“Ultimately, the result’s a rather more aggressive ‘where’ goal, without much additional clarity on the ‘how’ a part of the equation,” said Stifel shipping analyst Ben Nolan in a client note on Sunday. “That ‘how’ ambiguity should keep recent ship ordering limited.”
For shippers of containerized cargo, Friday’s agreement theoretically increases the danger of much higher freight costs in the longer term.
Despite pushback from China and other countries, the ultimate IMO agreement included a timetable to develop a worldwide carbon levy. There was “consensus on the necessity for a GHG [greenhouse gas] emissions pricing mechanism,” said ship brokerage BRS on Monday.
If a worldwide carbon levy is ever enacted, container lines must have a systemically easier time passing the price along to shippers than bulk commodity vessel operators would. In bulk commodity shipping, there may be already a game of hot potato over who gets stuck paying for environmental rules. Within the highly consolidated liner business, ship operators could just tack on one other customer surcharge.
What the IMO decided
The ultimate agreement is ambitious — the International Chamber of Shipping (ICS) called it a “historic deal” — but it surely’s peppered with vague language. “The language … is ambiguous,” said the Environmental Defense Fund. The Clean Shipping Coalition dubbed it “a wish and a prayer agreement.” The recent plan calls for:
- An “indicative checkpoint” to scale back shipping’s GHG emissions by at the least 20%, “striving for 30%,” by 2030 compared with 2008 levels.
- A “level of ambition” to make use of “zero or near-zero GHG-emission technologies, fuels and/or energy sources to represent at the least 5%, striving for 10%, of the energy utilized by international shipping by 2030.”
- An indicative checkpoint to scale back GHG emissions by at the least 70%, striving for 80%, by 2040 compared with 2008 levels.
- For the shipping industry “to achieve net-zero GHG emissions by or around 2050, taking into consideration different national circumstances.”
- For GHG emissions to be measured on a “well-to-wake” basis, i.e., not only emissions from ship operations but additionally from fuel production.
- For the IMO to develop a “maritime GHG emissions-pricing mechanism,” i.e., a carbon levy. The timeline calls for approval by 2025 and implementation by 2027.
Switch to methanol could triple fuel costs
The carbon levy is the one to observe for cargo shippers.
Container lines ordering recent ships have focused on two alternative-fuel types, each of that are rather more expensive than traditional bunker fuel: liquefied natural gas and methanol.
The overwhelming majority of container ships ordered over the past two years are dual-fuel, with methanol emerging as the popular alternative-fuel selection. The most recent shipyard contracts got here Tuesday, with Evergreen ordering 24 dual-fuel methanol newbuildings.
Existing vessels are being retrofitted, as well. Hapag-Lloyd and Seaspan announced Thursday that they’ll retrofit 15 vessels for methanol use, with an option for 45 more.
Methanol is triple the worth of very low sulfur fuel oil, said Hapag-Lloyd. Consultancy Drewry estimated that a switch to “green” methanol — methanol produced from biomass or by other means to achieve carbon neutrality on a well-to-wake basis — would increase fuel costs by 350%, equating to a further cost of over $1,000 per forty-foot equivalent unit for containers shipped from Asia to Europe.
For competitive reasons, dual-fuel vessels able to burning LNG or methanol are widely expected to proceed burning mostly fuel oil until the playing field is leveled by a carbon tax.
“Because the price differential is so big, governments and policymakers can have to adopt stronger or much more compulsory rules to force the change in the event that they want to attain green shipping,” said Drewry.
The brand new decarbonization targets “can only be achieved if the IMO rapidly agrees to a worldwide levy on ships’ GHG emissions,” said Simon Bennett, deputy secretary general of the ICS. “A majority of governments now support a levy for shipping involving flat-rate contributions by ships per ton of GHG emitted,” he said.
A worldwide carbon levy would equate to a big tax on shippers of commoditized goods and bulk commodities.
EU ETS: A taste of things to come back?
It stays removed from certain that the herd of cats — the 175 member nations of the IMO — will comply with a worldwide levy by 2025. Some major importing and exporting countries could block the levy in the event that they imagine it will cause an excessive amount of harm to their economies.
But no matter what happens on the IMO, vessel owners and their cargo shipper customers will face carbon pricing soon: The phase-in of shipping’s inclusion within the EU Emissions Trading System (ETS) begins Jan. 1, 2024.
“The EU ETS coming into force next yr goes to be rather more impactful [than other existing environmental regulations],” warned Carlos Balestra Di Mottola, CFO of product tanker owner D’Amico, on the Marine Money Week conference in June. “Given the present prices for CO2 allowances and bunker [fuel] prices, it could lead on to bunker costs on European voyages increasing by around 50%. That is kind of a steep increase.”
On Thursday, consultancy Hecla Emissions Management published projections for added EU ETS shipping costs of 17.2 billion euros in 2024-2026 — or $18.9 billion at current exchange rates.
Container lines have already confirmed that they’ll pass EU ETS costs along to cargo shippers via surcharges. This may give cargo shippers a taste of what’s to come back if a worldwide carbon levy deal is ever reached.
Effect on recent tanker and bulker orders
On the majority shipping side of the equation, only a few recent tankers and dry bulk carriers are being ordered. The capability of very large crude carriers (VLCCs; tankers that carry 2 million barrels of oil) on order is now a mere 1% of the on-the-water fleet, in keeping with Clarksons Securities.
Capability on order of Capesizes — larger dry bulk carriers with capability of 100,000 or more deadweight tons — is just 5% of the present fleet. The lower the orderbook-to-fleet ratio, the higher the prospects for future freight rates, assuming future demand outpaces inelastic vessel supply.
Uncertainty over allowable future fuels is one reason shipowners haven’t ordered recent tankers and bulkers. Owners don’t wish to pay for brand spanking new vessels that may grow to be prematurely obsolete, and banks don’t wish to finance them.
If the IMO were to aggressively move forward with a transparent strategy that gave shipowners comfort that their newbuildings would meet future regs, it will pave the best way for orders, a headwind for future rates. If the IMO consensus were to completely break down, it will also pave the wave for brand spanking new ships, convincing owners that they might safely construct conventionally fueled vessels, likewise negative for future rates.
As an alternative, there was a consensus on the IMO — and the takeaway for shipowners considering newbuildings was ambiguous.
Sticking to ‘wait and see’ approach
“What the IMO is effectively saying is ‘you should dramatically cut your emissions, you determine how, but in the event you don’t there will probably be serious repercussions,’” said Nolan. “Consequently, we expect most owners are prone to proceed to take probably the most prudent step of ‘wait and see’ before betting on a brand new fuel type for brand spanking new ships.”
In keeping with BRS, “There was hope amongst [tanker] owners that last week’s meeting would have provided a roadmap on exactly how shipping would decarbonize, with clear guidelines on how alternative fuels could be incorporated and promoted going forward.” As an alternative, “there may be the distinct impression that the disclosing of the nuts and bolts of the strategy has been kicked farther down the road.
“The tanker orderbook stays anemic and it appears unlikely that last week’s meeting will provide tanker owners with the clarity that they require to make future investments.”
This might ultimately backfire on the IMO’s decarbonization plans, said BRS. “If there just isn’t an influx of newer tankers … older, thirstier units will remain in service for longer,” which could be “contrary to GHG targets.”