Singapore — The shipping industry is gearing up for the challenge of IMO 2020. Some are queuing up for getting scrubbers installed, while the majority are preparing for using low sulfur fuel oil and marine gasoil. Both routes could come at a high price.
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The freight market is bracing for supply snags as scrubber bottlenecks and high-cost low sulfur fuels affect the number of ships transporting cargoes including coal, iron ore, crude and oil products, with many big operators spreading the risk between scrubbers and new marine fuels. "With all the delays at scrubber yards and so much uncertainty over fuel costs, it has made sense to share the risk between scrubbers and low sulfur fuels," one ship management company said.
Another executive with a tankers company said: "Owners do not want to put all their eggs in one basket as none is sure about the differential between low and high sulfur marine fuels" early next year.
There is also set to be increased difficulties with handling the new marine fuels, managing more systems on board ships and ensuring getting compliant liquids in ships at smaller ports, all leading to potentially higher freight rates andmarket volatility. Choppy waters are likely to persist at least for the first half of next year no matter the planning, and a trade dispute between the US and China has only added to the risk.
But the challenge around exhaust gas cleaning kits, or scrubbers, has escalated, with several market sources confirming that the next few quarters will see congestion in yards that retrofit the equipment.
"There is going to be a significant impact in the fourth quarter," a research expert at a ship broker said. "Vessels being taken to Chinese repair yards to retrofit scrubbers, especially on larger ships like Cape and Panamax [in the dry bulk market], but these yards are facing technical difficulties which have put them way behind schedule."
"Shipowners are panicking. If the forward curves are correct they could be saving money and instead they could lose out during the first half of 2020", the specialist added, noting that instead of taking three to four weeks to install a scrubber it is taking six to eight weeks.
While scrubber manufacturers are making a very strong pitch to highlight their benefits, not all shipowners are convinced or opting for them. Several tanker owners such as Ardmore Shipping and Euronav have stayed away.
BW Group's Hafnia Tankers is a case in point. It took delivery of its first three of half a dozen LR2s with scrubbersbut the next three will have them installed. It was too late to get them installed in the first three as they were in an advanced stage of production, said an executive tracking the scrubbers market. "There is a marked preference for installingscrubbers in new rather than existing ships and in bigger instead of smaller ships," the executive said.
Close to 70% of VLCCs - the larger ships that transport crude -- under construction and around a quarter of the overall global fleet of this category are expected to have scrubbers, according to shipping industry estimates.
Seventeen VLCCs are undergoing retrofit now, while 128 intend to or have plans to do so, according to the estimates of Straitship Brokers, a Singapore-based shipping brokerage. So far 43 new VLCCs have been delivered with scrubbers, while 30 existing units have been retrofitted, the estimates showed.
That said, scrubbers are likely to be installed in less than 5% of the global merchant fleet by early next year but many market participants expect the concept to become redundant sooner rather than later. When catalytic convertors were introduced in motor vehicles using leaded gasoline, it didn't work, the industry just moved on to unleaded gasoline, said Samir Fernandez of Maersk Oil Trading.
Industry sources highlighted other challenges with scrubbers, not least the introduction of ballast water systems at the same time. "For the guys on board they now have to handle two new systems - ballast water management systems and the scrubber too with a possible requirement for more personnel" a chartering source with a commodity trader said. Ballast water management is another environmental difficulty for shippers to navigate.
"It's a new era of risk and complication," one ship broker said, noting this is especially true for scrubbers given the newness to running, maintaining and repairing them.
There appears little consensus in the industry over the right strategies, with the emergence of a possible two-tier 0.5% sulfur bunker fuel market with the majority of shipowners expected to root for straight run 0.5% over the blended 0.5%sulfur fuel.
Then there are issues as to either cleaning tanks by dry docking for a few days or using chemical cleaning to rid tanks of higher sulfur fuels, which will add some grit to the wheels but won't cause major delays. Indeed, since some are already running and testing clean fuels in their tanks and others have stated they will stop buying dirty fuels by end-October, this may keep delays to a minimum amid fears of vessel failures.
An issue for smaller operators ensuring they can purchase compliant fuels at smaller ports and it remains an open question what sort of wiggle room there will be for operators arriving at the larger ports if they have been unable to secure clean options, sources said. If that starts to emerge ships may face delays as they wait for 0.5% bunker fuels to arrive. Indeed, even larger ports such as Fujairah have been importing larger quantities of low sulfur fuels from Singaporeahead of time. "This could increase waiting time at ports, adding to delays," one broker said.
Tankers could be faced with shortage of compliant fuels from the very beginning at smaller bunkering ports but the main hubs should be safe ports to go to, said Peter Sand, an analyst at key shipping body BIMCO.
But these premium fuels will come at a premium price, meaning smaller ships in particular - Handysizes and Supramaxesin the dry bulk market - will likely reduce speed to save money. One expert said that slowing a ship by one knot could supply costs by 4-5%. While slow steaming is not a new concept it is set to characterize the market for the next few quarters, sources said, given the likely higher rates.
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