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IMO's norms on cutting carbon in merchant ships likely from Oct 2022

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IMO's norms on cutting carbon in merchant ships likely from Oct 2022

Highlights

Radical move to rate ships on a sliding scale

Efficient, emission friendly ships may command a premium

Demolition of older ships could speed up

The draft amendments to the International Maritime Organization's mandatory rules on reducing carbon emissions in all ships globally, if adopted, are likely to be implemented from October next year and will be applicable to the world's entire commercial fleet, the IMO said Feb. 18.

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The measures will apply to all ships from the start of the regulation, which is likely to be October 2022, a UK-based IMO spokesperson told S&P Global Platts.

This is important because a section of the shipping industry, that Platts spoke with last week, were still unclear about the measures to be taken, exemptions and waivers, if any, and the looming deadline. Many among them said they were not aware of these upcoming measures.

On the other hand, some of these industry executives had said the new stringent rules may not apply to ships that were in existence prior to 2015, however, the spokesperson clarified that they "will apply to all ships from the date of entry into force of the requirements".

COMMERCIAL IMPLICATIONS

This is of significance as the average age of the global dry bulk fleet is already on the rise, according to Banchero Costa, or Bancosta, a global shipping brokerage and consultancy.

"Half of the global dry bulk fleet was built before 2011," Enrico Paglia, Bancosta's Genoa-based research analyst said. There is already a mismatch between the number of dry bulk carriers on order and those, which are overage, Paglia added.

The draft amendments will be put forward for formal adoption at an upcoming meeting of the IMO's Marine Environment Protection Committee, to be held in a few months. These measures, once implemented, likely to be in less than 20 months, can leave many ships unsuitable for trading if they do not reduce their carbon emissions.

The amount of tonnage likely to be impacted by IMO's latest carbon regulations is considerable, as at least 900 tankers will also be more than 20 years of age in 2023, Paglia said.

The owners may sell the ships for ongoing trading, or scrap them, Peter Sand, BIMCO's Copenhagen-based chief shipping analyst, said.

There will be a strong acceleration in demolition compared with what we had witnessed over the last two years when just 17 dirty and 45 product tankers were sent to scrapyards, Paglia added.

However, Sand contends, "there may not be a massive drop in active fleet on the back of this, as harsh as it may be".

Should demolition go up, the delivery of new ships is likely to rise, leaving the active fleet somewhat unchanged, he said. However, what could delay the effect to some extent will be the hesitation of owners in ordering new ships, as the "future regulatory environment is increasingly murky".

RATINGS

All ships that are of 5,000 gross tonnage and above, must calculate their carbon intensity indicator, or CII, to get a specific rating on a sliding scale of A to E, where the latter is inferior, the IMO spokesperson said. This figure will be recorded in the ships' energy efficiency management plans.

Ships that do not show good performance, such as not getting a rating of A or B, must show continuous improvement in carbon reduction, which then must be documented and verified, she said.

A ship rated D for three consecutive years, or E, would have to submit a corrective action plan, to show how the required index, C or above would be achieved, she added.

The spokesperson pointed out that ships that show themselves to be A or B rated, may receive incentives from authorities such as ports.

LONGER CHARTERS, COMPLIANT SHIPS

The entire concept of carbon intensity opens new vistas in commercial shipping, where for decades the quality of a ship, its sire and regulatory approvals have been determined by age and health of its hull and machinery.

The IMO spokesperson said the measures to be taken depend on the individual ship. "Each vessel is required to assess its energy efficiency as compared to a baseline".

The orderbook for the Supramax and Ultramax fleet is only 5% of the current trading fleet, while those over 20 years of age are almost 10%, Bancosta's Paglia said.

For Panamax and Kamsarmax, the ratio of orderbook to ships trading in the market is around 6%, while the old ships are almost 15% of the total fleet, he said. There are other factors accelerating demolition such as meeting the ballast water norms and adverse impact of rising bunker prices on old tonnage, he added.

Charterers will now be sniffing around for ships with better ratings, which in turn will command a premium in the freight market.

"There is likely to be something in the market like what was earlier seen for scrubber-fitted ships," BIMCO's Sand said. As charterers become increasingly aware of such measures, it will bring more focus on compliant ships, particularly for longer period charters, he added.