Market insight By George Laios,
IMO 2020, Ballast Water Treatment regulations, Green Recycling, GHG emissions, EEXI, CII, ETS, Fit for 55, Carbon price/levy, the Poseidon Principles are just a handful pieces of evidence that the environmental regulations are not only knocking on the door, but are already inside the shipping house and with the intention to stay for good.
Ship operators and managers, charterers, ship financiers must take good consideration of all the above before making any operational and investment decision; including placing an order for a new-building vessel, which has become the most complex decision to make, given all the new regulations and technologies coming up.
In this radically changing environment, ship financiers need to assist the industry to bear the burden of the enormous cost of the new regulations/technologies and in general the setting up of the new greener landscape. So far, and while claiming that they will incentivize international shipping’s decarbonization, the focus in the immediate future is to finance solely modern/ecofriendly vessels, while older vessels’ access to financing which would need it the most for their environmentally upgrade is constrained by leading banks and left to alternative financing. This bifurcation in lending constitutes an obstacle for ships that don’t already have green credentials to take significant investment steps towards the energy transition requirements.
Obviously, banks are afraid of being left with portfolios of assets that in 3-4 years’ time have a minimum value (being non green assets). On top of this, there is the concern that a two-tier assets market might develop when the new regulations kick in. The one tier being this of the greener ships and the second one being the tier with the older, non-eco ones that may be employed at a discount. This places another risk factor for the banks. The risk of their financing projects not being profitable anymore. In this context, older ships seem to be left with the operational choice of reducing engine power and thus lower speeds as a primary measure to be “emissions compliant”. While the choice split on the speed level between the shipowner and the charterer will largely depend on the prevailing freight market structure i.e. voyages or timecharters that older vessels will be opted to be deployed under, the sure thing is that they will all try to take advantage of it and negotiate the fixing rates.
Will this be the case? Will we have another scrubber – non scrubber dilemma going forward? Will the new regulations, emissions mitigation costs via carbon prices / potential fuel levies, limited financing options (or expensive options through alternative financing) and lesser charter rates increase scrapping considerations in 2-3 years time, given that approx. 23% of the combined bulk tankers and containers fleet is above 15 years of age? Does the market have the luxury of losing even a fraction of this via scrapping considering the freight market upcycle across most shipping sectors leads to increased deadweight requirements? Let’s just have a look at what’s happening nowadays due to elevated port congestion, which has tied up a significant share of the dry bulk and containers fleet creating market inefficiencies that have exercised strong upward pressures on freight rates with container rates at record high levels and dry bulk freight rates at the highest in 13 years.
Therefore, a further fleet supply squeeze creates good chances that younger vessels will benefit from a charter premium compared to their older peers. However, this that does not mean that older vessels will become obsolete. This is something that the banks need to realise and start supporting their clients when it comes to ”older” vessels’ financings. It goes without saying that the whole shipping value chain needs to adjust to the new greener environment regime. The banks need to support this new and highly expensive venture of their clients not just by not financing older vessels, but also providing real, monetary incentives that will have tangible and meaningful effect to their daily operating costs.
Chartering (Wet: Stabl
e+ / Dry: Stable-)
The Capesize market has corrected over the past week driving the Baltic Dry Index downward. On the other hand, the rest of the sizes enjoyed a strong performance w-o-w. The BDI today (19/10/2021) closed at 4,714 down by 664 points compared to previous Tuesday’s (12/10/2021) levels. The crude carrier markets presented a mixed picture last week. VLCC rates seem unable to build a positive momentum while the rest of the sizes displayed a more optimistic outlook with improvements in rates materializing in most of the regions. The BDTI today (19/10/2021) closed at 737 points, an increase of 36 points, and the BCTI at 568, an increase of 91 points compared to previous Tuesday’s (12/10/2021) levels.
Sale & Purchase (Wet: Stable+ / Dry: Stable+)
The clean tanker sector continues to be the main owner’s focus in the tanker SnP arena, while a stable but healthy volume of dry bulk secondhand deals also came to light last week. In the tanker sector, we had the sale of the “SCF URAL” (159,314dwt-blt ’02, S. Korea), which was sold to Middle Eastern buyers, for a price in the region of $16.0m. On the dry bulker side sector, we had the sale of the “LENA B” (81,922dwt-blt ’17, China), which was sold to Vietnamese owner, Ho Phat, for price in the region of excess $35.0m.
Firmer / Dry: Stable+)
A healthy number of newbuilding orders continues to surface on a weekly basis, with buyers’ interest being divided across all sectors last week. The Ultramax units have been extremely popular among the dry bulk sectors with a total of 33 units being ordered during the 2H of 2021. At the same time, newbuilding prices continue to soar, a trend which seems that have not affected owners’ appetite for dry bulk units given the skyrocketing earnings that the market has been enjoying during this year so far. In the Tanker sector, crude newbuilding activity was muted last week. Interest has been mostly focused on the clean sector with MR units attracting most of the interest; indeed, during the 2H of 2021 a total of 15 MR2 units were concluded. Lastly, apart from the Container sector which has seen a tremendous newbuilding activity amidst the historical earnings that has been enjoying during this year, LNG segment has also attracted huge interest. More specifically, according to our preliminary data, a total of 35 LNG vessels were ordered during the second half of 2021.
Demolition (Wet: Stabl
e+ / Dry: Stable+)
A rise in average offered scrap prices has materialized last week across the main Indian-subcontinent markets. Alongside the shortage of fresh vintage candidates which keep contributing to the skyrocketing scrap levels that we have been witnessing during this year so far, a notable improvement in steel demand which was followed by an increase in plate prices has boosted breakers confidence to secure more tonnage; as a result, we saw an increase in offered levels last week, with both Pakistani and Bangladeshi buyers competing with each other at the $600/ldt mark and with their Indian neighbors following closely. The Turkish demolition market has also noticed an increase in average scrap levels during the past days. Despite its currency historical depreciation (TRY exceeded 9.30 U.S. Dollar) the surge in imported scrap prices filled the gap and resulted in an increase in scrap values. Average scrap prices in the different markets this week for tankers ranged between 295-600/ldt and those for dry bulk units between $285-585/ldt.