Spotlight On Shipping Strategy Ltd
The Shipping Forecast
Shipping Strategy Ltd has joined Solis Marine’s Alliance, a new global network of independent partners. In this guest article, Managing Director Mark Williams considers the challenges of decarbonisation, the effect of it on shipping spend forecasts and how Shipping Strategy Ltd and Solis Marine are working together to help marine clients Build Back Better.
Voyage Towards Decarbonisation
The IMO’s ambitions to reduce C02 emissions means ships have to be 40 percent more efficient in 2030 than they were in 2008 and, if there is going to be any demand growth, then to meet the IMO’s 2050 emissions targets, ships effectively have to be carbon neutral by 2050.
The IMO has introduced targets for the shipping industry (not for individual ships), so on an individual ship basis we have to stop burning hydrocarbons sometime between 2030 and 2050 and move to something that doesn’t emit carbon dioxide.
The most likely candidates are, of course, hydrogen and hydrogen carriers like ammonia and hydrogen fuel cells. Unfortunately, the technology does not yet exist at the scale required for any of these to power large ocean going vessels.
Most transport sectors are hard to decarbonise. On land, the mantra is to electrify everything and then produce the electricity using renewables.
That of course is impossible for shipping. The ship needs to carry its own power source around with it. The problem with hydrogen alternatives is that on a volumetric basis to carry around the same as you would with bunker fuels, you would have to have bunker tanks up to four times as large.
Ships will either have to lose cargo space, or they have to make shorter voyages or refuel more frequently and that may well be the way we go. For the moment the technology question is up in the air.
What we do know is that in addition to what the regulators are trying to do at the IMO, the European Union has announced that from January 2022, shipping will be included in its Emissions Trading Scheme which means that ship operators who want to trade a ship in and out of a European port will have to buy permits for all the carbon dioxide that is being emitted for the entire voyage, not just that within European waters.
if you have come an exceptionally long way, for example from Asia with a 23,000 TEU container ship burning 100 tonnes of fuel oil a day on a 40 day voyage, emitting 3.1 tonnes of carbon dioxide for every tonne of fuel you have burned, your carbon bill is going to be quite big. Currently, carbon prices are about 50 Euros a tonne so the carbon price will be about 620,000 Euros.
On a per TEU basis that is not very much (about USD 27 per TEU), but for the ship operator it’s a pain. As the carbon dioxide price increases over time, the EU cuts the number of permits and there will be more people buying those permits, then there will be more incentive, regardless of the IMO’s mandate, just purely on the economics and tax +, for ship owners to switch over to alternative fuels.
PC: IMO Collection
A Wait and See Game
That is why ship owners are already switching over to LNG and they are increasingly looking at ordering ships with engines that will currently burn fuel oil or LNG and can later be switched over to ammonia. So we are trying to future proof ships now.
The big problem for ship owners is what we call the VHS v Betamax problem. Nobody wants to buy Betamax which is the superior system when VHS wins out because it’s the cheaper system.
Most ships owners are playing a wait and see game. What that means is that probably not enough ships will be ordered to meet significant demand growth in the near future, which means that the freight markets will probably go up.
Ship owners will be running older, polluting but very profitable ships for some years until they amass a war chest of money to go out and buy (around 2030) the next generation of ships which will operate on ammonia, hydrogen or synthetic fuels.
We’re at the stage where the regulators have done their bit, the industry’s sitting back waiting for the technology to catch up, but the new development I suppose is that the charterers have finally realised that they are going to have to pay the environmental costs of moving their cargo around the world as well as the commercial cost.
Ship owners will pass on the carbon prices to the charterers wherever they can. The charterers also, under TCFD and ESG programmes, have to reduce their Scope Three emissions as well.
Scope One and Scope Two are the emissions the charterers emit themselves, so from industrial processes or mining or whatever it might be. Scope Three are the greenhouse gas emissions in their value or supply chain which includes ocean shipping.
So the charterers are going to have to ask ship owners and operators to emit less carbon dioxide. In the future, it may be that charterers say I have a choice between a fuel oil ship or a methanol, hydrogen, electric or a wind-assisted ship and I’m just not going to hire a fuel oil ship because of my Scope Three emissions.
The Costs of Build Back Better
The bottle neck in all of this is the money. The reckoning is that the shipping industry will have to spend anywhere from $3 to $4 trillion between now and 2050 which comes to scores of billions of dollars a year to renew the fleet.
But probably three-quarters of that money will have to be spent on producing the fuels themselves and building the infrastructure to ensure that the fuel is available when the shipowners need it in the right quantities and specification at an affordable price which is exactly the standard marine fuel problem that we’ve always had.
The bunker market has always been about getting the right fuel at the right price in the right quantities. Those challenges won’t go away but we’ve got to replace the network of marine fuels bases which has built up over 150 years with something new in about 30 years.
We will be able to use the same ports and terminals but have to rebuild the infrastructure and a lot of that spend hasn’t been allocated yet. The banks will be keen to project finance that if it’s profitable and also if it meets their own requirements for only funding zero carbon projects.
The interesting thing at the moment is that governments around the world are spending something like $10trillion last year and this year on build back better infrastructure and low carbon support, so perhaps with some state support, soft loans and R&D tax grants, we are going to kickstart some of the commercial reality of the low carbon and zero carbon future.
Nowcasting and Forecasting
Shipping Strategy gives market views based on datasets that we have built up over the years including contextual macro-economic data. We are therefore in a position to give actionable insights from our data to our customers.
We are writing feasibility studies on whether or not it is too early to invest in Eco shipping. Or under what conditions would an Eco ship of a certain technological description be attractive to a lender under their TCFD conditions (which might differ from lender to lender).
Our contribution to decarbonisation is to try and forecast the freight markets in order to try and assist people in timing their investments.
By and large, we think government infrastructure spending means that as far the shipping markets are concerned you get a V shaped recovery from the pandemic. The pandemic was not an economic crash, it was an economic pause and in fact the business cycle is intact beneath it, it’s just that the down cycle that we were going thorough in 2019 got extended through 2020 and into 2021.
So, in addition to the economic recovery that would have begun last year, you’ve got all the extra stimulus spending which is driving a trade multiplier. So, for example, US manufacturing at the moment can’t keep up with demand so the US is having to import capital goods and consumer goods leading to a huge increase in trade which is great particularly for container ships and dry cargo ships. It goes all the way down the value chain.
That stimulus spending is likely to support freight markets through this year and next year. We have just published our quarterly dry cargo outlook and our forecast is that the freight markets won’t peak until Q4 2022.
Longer term, people have to consider very carefully the technology of any ships that they want to invest in because the commercial attractiveness of any investment will depend largely on what fuel it has, what energy efficiency tech it has on board, whether or not it meets certain IMO requirements under the Energy Efficiency Design Index and all the other regimes in place.
That means the commercial due diligence for an investment also has to have a large technological component and that is where Shipping Strategy and Solis Marine can work together.
Say you have an investor that is looking at some assets. They have been offered an equity position or a debt position in a fleet of ships that are being built in a Chinese shipyard and they are going to go on a 10-year charter to an oil or gas company, and they are being built with some new technology.
As an investor what I want to know is, are the counterparties – the shipowners and the cargo owner – going to perform? What is their market going to look like over the next five to 10 years. Are they going to ship something that’s going to be made illegal in that period, are they going to ship something that’s going to go out of fashion?
If you are offered a position to invest in or lend to a new building project or a retro fit project you need to have an understanding of the commercial outlook for the assets and you need to understand the technology.
And the technology is evolving so rapidly now we need an organisation that can advise on the viability of the technology, its potential longevity or otherwise, how future proof it is from a technological and commercial perspective and what all of that is going to do to your residual asset value.
That is where we work together and add value. We understand what the investors’ requirements and anxieties are and that is what we work together to address.
The Next 5,000 Years
We are currently seeing investment in two places. Anything that is relatively easy to decarbonise is where you will see the spend. That includes anything that spends a lot of time in port where it can be plugged in. Ferries, short sea vessels, offshore vessels, coasters, river going ships. The EU thinks there are nearly 12,000 inland cargo ships that need to be re-engined over the next seven years which is a lot of investment.
The second place is in ships which are going to bear the biggest carbon pricing burden. That’s the really big thirsty ships, but a particular sub set of those are the big container shipping companies who know what their fuel spend is going to be because they run scheduled services.
That’s why you have companies like CMA CGM who have just ordered 22 huge container ships in China at a cost of several billion dollars which will be powered by dual fuel LNG engines. It’s a lot of money but it might make sense by the time those ships deliver. If carbon prices in Europe are say 100 Euros a tonne, it makes sense to be running those ships as opposed to a fuel oil ship because you can offer a lower freight rate to your customers than the guy running the fuel oil ship by passing on the saving of the carbon taxes.
The hard to decarbonise bits of shipping are tramp shipping where you don’t know where you are going to be sailing from one voyage to the next. It’s the Uber model of shipping. In fact Uber stole its model from shipping. The difference is that at Uber you only have one broker – Uber.
In shipping you have thousands of shipbrokers around the world all doing the job so maybe you will see consolidation in the shipbroking sector which I think has already begun as they get big enough to handle the quantities of data that are going to be required for greater information collaboration in the future.
Rise of the Uber-Databroker
The shipping market is interesting because everyone thinks your stock in trade is ships. But actually your stock in trade is information. Data. And whoever has access to more data has access to a better negotiating position. That makes the ship markets very adversarial between the asset owners and the people who hire assets.
In order to achieve decarbonisation you need much greater collaboration between counterparties and much greater information sharing. For instance, instead of having the traditional rush and wait system of freight, you plan your voyage a lot better in order to minimise your fuel spend and therefore your emissions.
That requires a change in attitude from the charterers and more information sharing. There have been recommendations by the likes of BIMCO to re-write some of the hire agreements for ships to better share information on fuel use and just in time arrival rather than the rush and wait model.
There has been a sea change in attitudes and business models are changing, however the sharing of information has to continue. For example under the Monitoring, Reporting and Evaluation scheme the EU introduced in 2019, ocean going ships have to report their fuel use and that is used to estimate their carbon dioxide emissions.
For the first time ever we actually have some real numbers on the bunker volumes consumed each year and they turn out to be a bit lower than anybody thought which means ships are a bit more efficient than anybody thought. This helps us planning for where we have to go to meet the IMO’s ambitions.
The shipowners, their lenders and financiers, their customers, the ports and terminals, the regulators, the technical and commercial managers – the entire value chain around shipping has to learn to share information better, which is contrary to how the industry has operated for the last 5,000 years.