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
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.