The global shipping industry, which moves about 90 percent of world trade on some 60,000 merchant ships, continues to face very difficult markets. This is primarily due to chronic overcapacity. There are far too many ships chasing after not enough cargoes, as far too many new vessels were ordered in the halcyon days before the 2008 economic crisis. But the shipping industry faces another major challenge: the estimated cost of compliance by the global industry with new environmental regulations is expected to amount to over $500bn over the next decade.
Therefore, while the shipping industry may be just about to turn a corner following a major downturn that has lasted more than six years, there is real concern that the need to comply with an avalanche of new rules could inhibit a sustainable recovery just as soon as it gets started. The industry’s global regulator, the UN International Maritime Organization (IMO), has adopted these new regulations. These IMO rules will be strictly enforced worldwide, with the industry committed to full implementation. But the fact remains that these very large additional costs are about to impact at more or less the same time.
Reducing harmful emissions
Expensive new rules on sulphur emissions that will dramatically increase fuel costs to ships will be included, and mandatory measures to reduce C02. Shipping is actually the only industrial sector already to have a global C02 regime in place via the IMO, with the goal of reducing emissions of 20 percent by 2020, and further reductions going forward. Ships will also shortly have to comply with new requirements to install very expensive equipment to treat millions of gallons of ballast water, intended to address concerns about the threat to local ecosystems that can be caused by ships transporting species.
Sulphur content of fuel permitted outside emission control areas (EU and US)
A new IMO Convention is expected in 2016 that will require most of the existing ships – if they wish to continue to trade – to be retrofitted with treatment equipment costing up to $5m per vessel. A ship is normally built with a life expectancy of at least 25 years. But many owners of 15-year-old ships may be thinking very carefully about whether to cut their losses now and scrap the ship instead.
The $50bn total cost is in fact probably a very conservative estimate given the uncertainty of the costs of fuel, or the longer-term intentions of governments with respect to things such as carbon charging. But the most dramatic new costs will arise from the requirements to reduce the sulphur content of less than marine fuel. Since 1 January this year, to address concerns about health impacts, ships must now use fuel with sulphur content less than 0.1 percent in emission control areas established in Europe and North America. In 2020, however, it has been agreed that a global sulphur cap of 0.5 percent will apply compared to 3.5 percent that is currently permitted in the middle of the ocean.
Fuelling the costs
This change is very important because fuel is the ship operator’s most expensive cost – even allowing for the recent dramatic fall in oil prices. In 2005 the cost of fuel, when averaged over a ships’ typical 25-year life, was roughly a third of the capital cost involved in constructing a ship and servicing the debt. Today this relationship is the other way around, with fuel being almost double the capital costs.
A small dry bulk carrier (carrying iron ore) might typically use about 25 tonnes of fuel a day. A very large crude oil carrier (a ‘super tanker’) might typically burn about 80 tonnes. However, one of the new generation’s of very large container ships carrying over 10,000 20ft containers might burn as much as 250 tonnes a day.
Residual fuel oil, which most ships currently burn, typically costs about $600 a tonne. Assuming a ship is working for 200 days a year, this translates into annual fuel costs of roughly $3m for a bulk carrier, $10m for large tanker and for a large containership some $25m a year. Many ships are therefore now operating at much slower speeds.
In the future, however, to comply with the sulphur rules, ships will increasingly have to use distillate (diesel) fuel that is almost twice as expensive as the residual fuel that most ships currently burn. The increased demand for diesel grade fuel from shipping may also have an impact on the land based industry too. Although the impact of the sulphur rules has been mitigated by the recent fall in the price of oil, these lower prices are unlikely be permanent. The brave new world of low sulphur fuel is therefore a very serious challenge for international shipping.