Bumper earnings from operating dry bulk ships hauling commodities such as iron ore, coal, and grains, have incentivized shipowners to speed up their vessels, which in turn is possibly amplifying carbon emissions from this segment.
The multi-year record dry bulk freight rates have forced the average sailing speed of these ships to a decade high with shipowners cranking up their vessel engines starting from the smaller Handysize to the larger Capesizes.
The time charter rates across all dry bulk vessel segments have risen sharply in 2021 compared with weak freight levels in early 2020, when global economies were grappling to control the COVID-19 spread.
It's a fact that ship emissions are reliant on vessel speed and the current firm market has emboldened owners to sail faster.
According to data from ship valuation provider VesselsValue, the average laden speed in August was 11.62 knots, the highest since January 2012, and up 8% from 10.75 knots in February 2020.
The trend was similar on the ballast leg, with the average reaching 11.95 knots in June, the highest since November 2012, and up 4.25% from 11.46 knots in February 2020.
While vessel speed is influenced by market forces and economic compulsions, ships consume more bunker fuel at elevated speeds and emit more carbon.
As per industry estimates, fuel consumption in the sub-Capesize segments surge by around 4-5 mt/d on average when speed increases by about 1 knot. Capesize ships consume close to 10 mt extra per 1 knot gain in speed. Market participants, however, said the relationship is not exactly linear over the whole range of speeds a ship can technically run.
Consider a Capesize ship performing a round trip carrying iron ore from Tubarao, Brazil to Qingdao, China, having ballasted from China. It takes about 90 days and burns 3,467 mt of fuel oil basis 43 mt/d at a laden eco speed of 12 knots and ballast speed of 13 knots.
If the same trip is done at a laden full speed of 14 knots and ballast at 15 knots, the duration of the trip falls to around 79 days, while the total fuel oil consumed swells to 4,298 mt at 62 mt/day.
Typically, a ship burning 1 mt of fuel oil produces a little more than 3 mt of CO2, according to various studies quoted by market participants. Therefore, the trip performed at a higher speed on the Tubarao to Qingdao route by a Capesize would emit an additional 2,493 mt of CO2, a 24% increase.
Also, on key Western Australia to Qingdao iron ore route, which is a shorter 25-day trip basis eco speed, should the ship sail at full speed to complete the voyage in almost 21.5 days, the carbon emission jumps by about 23.5%.
"After so many years of bad market [adhering to eco speed and controlling carbon emission] is difficult. [Owners are] trying to maximize their earnings," a ship-owning source said, adding that it was difficult to not be tempted by the current firm market.
The Platts Cape T4 Index -- a trade flow based weighted average of four key Capesize routes -- averaged $43,470/d in August, the highest since it was launched in November 2019 and almost 12 times over the $3,724/day registered in February 2020.
Similarly, the KMAX 9 and APSI 5 indexes -- trade flow based weighted averages of nine Kamsarmax routes and five key Supramax routes within Asia Pacific -- reached $32,455/d and $34,032/d, respectively, the highest since their launches in May 2020 and February 2021.
An analysis of the Platts Capesize time charter equivalent rates showed that when returns move closer to $44,000-$45,000/d, switching to higher speed would provide better earnings at current bunker prices.
However, questions remain whether shipowners have the luxury of increasing vessel speeds given the upcoming International Maritime Organization regulations aimed to reign in vessel emissions.
EEXI, CII – Game changers
In June, the IMO adopted new CO2 regulations -- Energy Efficiency Existing Ship Index, or EEXI, and Carbon Intensity Indicator, or CII -- applicable to existing ships from 2023.
The EEXI addresses the technical efficiency of ships and the CII rating scheme will measure operational efficiency, while the enhanced Ship Energy Efficiency Management Plan is a tool to control greenhouse gas emissions. According to the IMO, shipping accounts for around 2.2% of all global greenhouse gas emissions.
The CII measures how efficiently a ship transports cargo and is calculated in grams of CO2 emitted per cargo-carrying capacity and nautical mile. Ships are given a specific rating on a sliding scale of A to E, where the latter is inferior. 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.
Market sources foresee a reduction in vessel speed as the likely first step from shipowners to cut carbon emissions, while the search continues for other energy efficient technologies and alternative fuels.
"The [current] 2-knot increase [in speed] should misalign the trip from the decarbonization trajectory. This could have a real impact on the chartering side [by] increasing the spread between eco and standard ships and possibly affecting ships' supply in the future," Enrico Paglia, a Genoa-based senior analyst with global shipping brokerage and consultancy Banchero Costa, or Bancosta, said.
"CII and EEXI will only enter into force on Jan. 1, 2023, moreover, EEXI is a technical index which is not affected by the operational speed; hence these are not currently issues for owners," he said.