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SHIPPING: Carbon tax proposals ahead of IMO meeting make owners jittery

Highlights

Owners doubt carbon costs' recovery

Maersk CEO's tax proposal fails to cut much ice

Concerns over green fuels' supply

Shipping industry fears that any imposition of a carbon tax on ships that use traditional bunker fuels, to encourage greener fuels is likely to make freight exorbitantly expensive, reduce already paltry earnings and discourage investments on new builds, market participants said June 8.

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The Marine Environment Protection Committee, or MEPC, of the International Maritime Organization is scheduled to meet June 10-17, where according to sources several issues related to reduction of carbon emissions are likely to come up for discussion.

IMO is a UN affiliate body and the shipping industry is expecting clearer guidelines on indexes to reduce carbon intensity that may become operational as early as end of next year. The MEPC meeting will be followed by that of the IMO council by end June.

In the run-up to the IMO gatherings, Soren Skou, CEO of Maersk Line, the world's largest containers shipping company proposed a carbon tax on ship fuel of at least $450/mt fuel, or $150/mt CO2, to bridge gap between fossil fuels and costlier greener alternatives.

"The message being given to shipowners is that here is another bill to be paid. If you are lucky, you can pass it on to the charterers or end users but if not, settle it yourself," a senior executive with one of the largest tankers' company by fleet size told S&P Global Platts.

Maersk's Skou has not yet replied to the email sent by Platts but a dry bulk shipping executive said that instead of making such proposals where tax collection is impractical, better option will be to reduce carbon emissions from existing fleet. "The first step to do so will be to use dual fuel engines and LNG bunkering, which can cut emissions by upto 20%," he said.

Executives managing tankers said their earnings are already very poor with recovery unlikely in near-term and any fresh tax will make it difficult for them to pay off their debt.

VLCCs, that typically carry two million barrels of crude and fuel oil each, are currently losing almost $3,000/day on the Persian Gulf-North Asia routes, according to the estimates of brokers. Long Range II, or LR2s, a very popular ship size to move cargoes from Persian Gulf to East Asia, are earning not more than $1,500/day, the estimates showed.

Missing green fuels

A common refrain in the shipping sector is that, crude prices and by default bunker costs have gone up at a time when "owners are bleeding."

Shipowners are paying around $520/mt for bunkers in Singapore, well above the year-to-date average of $496/mt, they said.

Bunker costs will further double if such a carbon tax is implemented, another dry bulk shipping executive said. There is also concern over green fuels' supply.

Earlier this year, shipping bodies such as BIMCO submitted a proposal to the IMO, calling for bringing forward discussions on carbon tax, by several years. However, they conceded that for a pricing signal to work, there must be viable alternatives to fossil fuels, which don't yet exist for large ships.

Environmental activists argue that these proposals are for the medium term and not related to daily prices.

A carbon tax on shipping fuels will bring about a level playing field among such bunker types and if mandatorily implemented, international trade and markets will find their own equilibrium where it will be passed on to charterers and end-users, one such activist said.

Shipping industry executives mostly disagree with this contention. "Targets to reduce emissions are politically decided and market economics are completely irrelevant while doing so," the senior shipping executive said.

Slow fleet expansion likely

A chartering executive said that Maersk's proposal shows that even among a large section of the shipping industry, the current attitude is, "there is too much carbon around, it will cost you money if you put it in the air, otherwise find out ways to look greener."

His company mostly trades in commodities and had decided few years ago not to invest on ships and sold-off the 2-3 ships they controlled. The argument put forward is that maintaining a fleet does not necessarily reduce costs and on the contrary is expensive, particularly at a time when new regulations on fuel emissions and management are being implemented.

Sources said levying a carbon tax will reduce the scope of maritime earnings, investors may be discouraged from putting their money on ships and instead move towards assets classes such as gold and forex.

At present the global VLCC fleet is estimated by brokers at around 840 tankers with 20 likely to be delivered this year and another 45 in subsequent years, making the orderbook size less than 8% of the fleet. For a fleet of 360 LR2s, the orderbook size is also similar at just under 8%.

Due to the uncertainty over carbon regulations, many maritime companies are playing safe by investing in second hand ships, said a broker in Singapore.