Container lines may need to hike freight rates by up to $450/TEU in deepsea trade to cover additional expenses arising from decarbonizing their maritime operations with low-carbon fuels, according to a study by consultancy UMAS published Dec. 7.

With pressure from regulators and some eco-conscious customers, a growing number of shipping companies have been seeking to switch to alternatives to conventional oil-based fuels to reduce greenhouse gas emissions.

But the low-carbon transition requires extra investments in new propulsion systems and “green” fuels, and the UMAS study finds additional costs in running a zero-emission ship could range between $30/TEU and $70/TEU on a Chinese coastal route and between $90/TEU and $450/TEU on a trans-Pacific route in 2030.

The Platts Container Index, a weighted average of spot rate assessments on key routes, stood at $913.73/FEU on Dec. 6. Platts is part of S&P Global Commodity Insights.

“The fuel cost gap is now acknowledged as the main blocker for shipping’s transition and tackling it requires of a frank conversation about the dimension of the challenge,” said Camilo Perico, a UMAS consultant who penned the study. “We need ‘numbers on the table’ and more visibility on how stakeholders can help to cover it.”

Based on UMAS’ analysis, an additional $20 million-$30 million/year would be required for deploying a ship on scalable zero-emission fuels on the trans-Pacific route between Shanghai and Lon Angeles, including $18 million-$27 million/year in fuel costs.

For the coastal trade, an extra $4.5 million-$6.5 million/year are required, including $3.6 million-$5.2 million/year in fuel.

“The analysis shows fuel costs are a major component of the overall cost and therefore the primary driver of the total cost of operation,” said Nishatabbas Rehmatulla, principal research fellow at UCL Energy Institute and co-author of the study.

“With the right demand signals and corporate action during the emergence phase, production and supply of zero emission fuels and freight services can make a head start in lowering the cost gap that this work has shown.”

Future fuels
Currently, methanol has emerged as a popular choice among container lines as a future fuel due to readily available technology and existing supply infrastructure, with shipbroker Braemar estimating 166 methanol-capable boxships on order as of Dec. 6.

But UMAS suggested that ammonia could be a cheaper option eventually, even as the fuel is highly toxic and corrosive and the first ships powered by ammonia are only expected to hit the waters in the second half of this decade.

Compared with a conventional ship, operating a ship powered by e-ammonia could cost $150/TEU more and e-methanol $210/TEU more on a trans-Pacific route in a low fuel price scenario in 2030, according to the UMAS study.

In a high price scenario, the cost difference could rise to $350/TEU for e-ammonia and $450/TEU for e-methanol.

Bio-methanol is a non-scalable fuel that will “become more expensive as demand outstrips supply,” and early movers in the energy transition could “invest in fuels with a higher capital expenditure, thus stimulating a more likely long-term solution that will become cheaper as production ramps up and demand grows,” according to UMAS.

Platts assessed the bunker cost for 0.5% sulfur marine fuel — the prevalent bunker fuel — at $540/mt in Rotterdam on Dec. 6. Green methanol is two to five times more expensive, with bio-methanol cheaper than e-methanol for now, industry estimates suggest.

The cost for e-ammonia produced on the eastern coast of Canada for delivery into Northwest Europe was last assessed by Platts at $758.56/mt on Dec. 4.

Policy support
The EU, the US and the International Maritime Organization, among other regulators, are launching new policy initiatives that could narrow the price gaps between fossil and green marine fuels.
This, coupled with market participants’ “willingness to pay the cost difference,” could help scale up production of low-carbon fuels in the next few years, according to UMAS.

“The cost gap is expected to narrow out to 2050,” UMAS said. “The role of early movers including cargo owners, and their willingness to pay is therefore vital in setting up a zero-emissions shipping market.”

For ships powered by e-ammonia and e-methanol, their operational costs would be two to four times higher than a conventional ship in 2030. In 2050, most scenarios show the differences will narrow to 1.5 to two times more, according to UMAS.

Source: Platts