Freight costs to rise as fuel rule leads to slower ships

Num­ber of vessels on high seas will be cut as curbs on sul­phur emis­sions take ef­fect in 2020

The Straits Times - - WORLD -

LON­DON If you hap­pen to be at the beach this sum­mer, make a men­tal note of any gi­ant freighters cross­ing the hori­zon. In a few years’ time, those same ships will prob­a­bly be mov­ing just a frac­tion slower.

If the slow­down does hap­pen – and the likes of Cit­i­group say it will – then the wider con­se­quences would be pro­found for both the ship­ping i ndus­try and its cus­tomers, given that about 90 per cent of world trade moves by sea.

The fleet slow­down is be­ing an­tic­i­pated be­cause of rules man­dated by the In­ter­na­tional Mar­itime Or­gan­i­sa­tion (IMO) in Oc­to­ber 2016 that vessels cap sul­phur lev­els in their fuel from 2020.

Do­ing so should help to fight hu­man health is­sues such as asthma, as well as acid rain.

While such a slow­down might shave bil­lions of dol­lars off shipown­ers’ sin­gle largest ex­pense – fuel – it would also ef­fec­tively limit the num­ber of avail­able vessels, risk­ing an up­ward spi­ral in freight costs.

“It’s go­ing to im­pact all of ship­ping – con­tain­ers, tankers and, in par­tic­u­lar, dry bulk,” said Mr John Kart­sonas, man­ag­ing part­ner at Break­wave Ad­vis­ers, which runs an ex­change-traded fund for dry bulk ship­ping. “You will have shipown- ers in­struct­ing their cap­tains to slow down and, if every­body does, global sup­ply will come down sig­nif­i­cantly.”

As the dead­line ap­proaches, the de­ci­sion is start­ing to rip­ple through the global trad­ing sys­tem, cre­at­ing win­ners and losers in both the re­fin­ing and ship­ping in­dus­tries.

The rule is ex­pected to make IMO-com­pli­ant fuel more ex­pen­sive, which ship­ping com­pa­nies are try­ing to off­set.

Re­duc­ing speeds, or slow steam­ing, “will be part of the arse­nal of op­tions that we as shipown­ers will have avail­able to us”, said Mr Brian Gal­lagher, head of in­vestor re­la­tions at crude oil tanker firm Euronav.

“It will be very de­pen­dent on what the costs are and what the en­vi­ron­ment is when we get to 2020.”

An­a­lysts have pre­dicted that the rule change will cre­ate an ex­tra US$40 bil­lion to US$60 bil­lion (S$55 bil­lion to S$80 bil­lion) in costs for ship­ping com­pa­nies, which the in­dus­try will pass along to its cus­tomers.

That could af­fect trade in every­thing from com­modi­ties like oil, soya beans and steel to items that move on con­tainer ships, like TV sets, fur­ni­ture and clothes.

“We see that as a crit­i­cal is­sue, the abil­ity of oper­a­tors to pass on this ex­tra cost,” said Mr Peter Sand, chief ship­ping an­a­lyst at Bimco, a Den­mark-based in­dus­try group that rep­re­sents shipown­ers.

“The ship­ping in­dus­try does not have a fi­nan­cial war chest to cover an es­ca­lat­ing cost like that.”

Shipown­ers have lim­ited ways to com­ply with the rule change.

They can buy IMO-com­pli­ant fu­els, though it is not clear if there will be enough to go around. They can in­stall pol­lu­tion-re­duc­ing scrub­bers, but the cost of those up­grades has de­terred in­vest­ment.

A third op­tion is to sim­ply slow down, since own­ers can cut fuel con­sump­tion dis­pro­por­tion­ately by sail­ing their fleets more slowly.

“For tankers, the ma­jor­ity of the fleet will show up in 2020 with­out scrub­bers,” said Mr Svein Moxnes Har­f­jeld, joint chief ex­ec­u­tive of­fi­cer of crude oil tanker com­pany DHT Hold­ings.

“That fleet will have to con­sume com­pli­ant fuel. This fuel is ex­pected to be quite ex­pen­sive. This part of the fleet might con­sider slow speed to save cost on fuel.”

Slow steam­ing is the most likely way for ship­pers to re­spond to high fuel costs, an­a­lysts at RBC Cap­i­tal Mar­kets said in a July 11 note.

“Fuel con­sump­tion has a non-lin­ear re­la­tion­ship with speed, so any given re­duc­tion in speed leads to a greater re­duc­tion in fuel con­sump­tion,” the an­a­lysts wrote.

Slow­ing by just 1 knot, or 1.9kmh, could al­low oil tankers to save as much as 17 per cent on its fuel con­sump­tion, an­a­lysts at Cit­i­group said in a June re­port.

Bulk car­ri­ers – those car­ry­ing car­goes like iron ore, coal and crops – and con­tainer vessels could save as much as 37 per cent by slow­ing by 1.5 knots.

That is not good news for com­pa­nies look­ing to send their com­modi­ties from con­ti­nent to con­ti­nent in a hurry. Not only would the voy­age be­come more ex­pen­sive, a re­duc­tion in speed could add days to a trip from, say, Europe to Asia.

For­tu­nately for them, slow steam­ing is likely to be only a tem­po­rary fix, as the mar­ket ad­justs to IMO’s rules and the as­so­ci­ated higher fuel costs.

“You may slow steam ini­tially, but there will al­ways be some­one who will sail a lit­tle bit faster and char­ter a lit­tle bit less, to get the busi­ness done,” said Mr Sand.

Newspapers in English

Newspapers from Singapore

© PressReader. All rights reserved.