Older vessels to be phased out within two to three years of IMO sulphur cap

Older vessels are expected to be sent for demolition quickly. Credit: Getty Images
Older vessels are expected to be sent for demolition quickly. Credit: Getty Images

Tougher global emission limits for shipping from 2020 could see a surge in scrapping of older, less fuel-efficient vessels within two or three years of the enhanced International Maritime Organization (IMO) regulations coming into force, shipping commentators said.

The switch from high- to low-sulphur fuel could cost the shipping industry between USD46 billion and USD69 billion a year based on current fuel demand, the price differential between high-sulphur and distillate fuels and how many vessel owners and operators switch to less polluting fuels.

Owners and operators can switch to low-sulphur fuel, fit exhaust scrubbers, or use alternatives such as liquefied natural gas to comply with the IMO’s 0.5% sulphur cap, which will come into force on 1 January 2020.

The dry bulk sector is expected to develop into a two-tier chartering market between older and new tonnage, said Lei Yang, China ocean freight head for commodities group Cargill. The higher fuel consumption of older vessels, which sees operators paying USD2–3 million a year more for fuel compared with the latest ship designs, will hasten their demolition.

“The older fleet will be phased out very quickly after 2020 – within two or three years,” Yang told the Marine Money Hong Kong ship finance forum.

There are about 1,780 bulkers, ranging from 20,000 dwt Handysizes to 380,000 very large ore carriers, that are more than 15 years old, shipbroker Banchero Costa (Bancosta) said in a February report. These include 316 Handymax ships of 40,000–50,000 dwt, equal to 62% of the Handymax fleet and 532 Handysizes, or 54% of vessels between 20,000 dwt and 40,000 dwt.

That comes as Bancosta expects zero fleet growth in the Handysize/Supramax segment in 2019 and a 1% drop in the fleet in 2020. The Panamax and post-Panamax fleet is also on course for zero growth in 2020 after edging up by 2% in 2019.

Container ship operators alone are forecast to see their annual fuel bill rise by USD25 billion a year, leading to more older vessels being sold for scrap, said Parash Jain, global equity sector head for shipping and ports and head of Asia Pacific transport research at HSBC.

“About 4 million teu [about 20%] will be 15 years or older by 2020 … and are likely scrapping candidates,” Jain said.

A further 620 very large crude carriers, Suezmax, and Aframax tankers are more than 15 years old, Bancosta figures showed.

“The USD200 [per tonne] difference between low-sulphur and high-sulphur fuel will mean the market will phase out [older] secondhand ships,” Yang added.

There is a current differential of about USD230/tonne based on Singapore prices between high-sulphur bunker and low-sulphur distillate fuel. With the shipping industry consuming about 300 million tonnes of high-sulphur fuel a year, that adds up to about USD69 billion in extra fuel costs.

Yang thought low-sulphur prices would climb higher when the global cap on 0.5% sulphur comes into force but then fall as supply increased.

Yang added that Cargill, which operates a chartered fleet of 700 bulkers on any given day, would support owners that use low-sulphur fuel or open-loop scrubbers.

“If I was Cargill I would encourage every owner to fit a scrubber. If I was an owner, I’d say the opposite,” he added.

But Bjorn Hojgaard, chief executive at Hong Kong-headquartered ship manager Anglo-Eastern, questioned how many owners would fit scrubbers rather than switch to low-sulphur alternatives.

He estimated it would cost shipowners about USD200 billion to retrofit the entire merchant fleet with scrubbers. This extra cost, together with a raft of installation and operating issues, including the added weight, power supply, maintenance, and cleaning that scrubbers would require, meant he expected very few owners to fit the equipment.

“Out of 632 ships in the Anglo-Eastern fleet, I expect fewer than 10 ships to be retrofitted,” Hojgaard said.