If shipping is the heart of global trade, its beat is about to slow.
Many shipping companies are sticking with ageing fleets due to uncertainty about which fuels to use in the long term to reduce greenhouse gas emissions, but older vessels may soon have to start sailing slower to comply with new environmental rules.
Beginning next year, the International Maritime Organization (IMO) will require all ships to calculate their annual carbon intensity based on a vessel’s emissions for the cargo it transports – and demonstrate that it is gradually decreasing.
While older ships can be retrofitted with emission-reducing devices, analysts say the quickest fix is simply to go slower, with a 10% reduction in cruising speeds reducing fuel consumption by nearly 30%, according to marine sector lender Danish Ship Finance.
“They’re basically being told to either improve the ship or slow down,” Jan Dieleman, president of Cargill Ocean Transportation, the freight division of commodities trading house Cargill, said. Cargill Ocean Transportation leases more than 600 vessels to transport primarily food and energy products around the world.
Supply chains are already stressed as economies recover from lockdowns, pandemic disruptions at ports, and a lack of new ships. If older vessels join them in the slow lane, shipping capacity could be reduced even further at a time when record freight rates are driving up inflation.
According to data from shipping analytics firm Clarksons Research, only about 5% of the world’s fleet can currently run on less-polluting alternatives to fuel oil, despite the fact that more than 40% of new ship orders will have that option.
However, new orders are not coming in quickly enough to reverse the trend of an aging fleet across all three major cargo vessel types: tankers, container ships, and bulk carriers, according to data provided to Reuters by Clarksons Research.
By June 2022, the average age of bulk carriers, which transport loose cargo such as grain and coal, had risen to 11.4 years from 8.7 five years earlier. According to the data, container ships now have an average age of 14.1 years, up from 11.6, while tankers have an average age of 12 years, up from 10.3 in 2017.
“Because of the uncertainties surrounding future fuels, some ship owners have preferred to buy used vessels,” said Stephen Gordon, managing director at Clarksons Research.
LARGE ORDER
Orders for new container ships reached a record high in 2021 and are still coming in at a healthy clip this year, but because the appetite for new tankers and bulk carriers is much lower, the current order book for all three types of vessel only accounts for about 10% of the fleet, down from more than 50% in 2008.
Shipping companies account for approximately 2.5 percent of global carbon emissions, and they are under increasing pressure to reduce both air and marine pollution.
Emissions from the industry increased last year, highlighting the magnitude of the challenge in meeting the IMO’s target of halving emissions from 2008 levels by 2050. The organization is now under pressure to go even further and commit to net zero energy by 2050.
Some businesses are testing and ordering vessels that run on alternative fuels like methanol. Others are working on ships that can be retrofitted to run on fuels other than oil, such as hydrogen or ammonia. There’s even a return to wind, with companies like Cargill and Berge Bulk testing massive, high-tech sails.
However, many potential low-carbon technologies are still in the early stages of development and have limited commercial application, which means that the majority of new orders are still for vessels powered by fuel oil and other fossil fuels.
More than a third, or 741, of the vessels on order will be powered by liquefied natural gas (LNG), 24 by methanol, and six by hydrogen. According to Clarkson’s data, another 180 have some form of hybrid propulsion using batteries.
Many shipping companies are hedging their bets, primarily because extending the life of vessels is less expensive and less risky than new construction. They also gain breathing room as they wait for the winning new technologies to enter the mainstream.
“We have a clash between an industry that is very long-term investment oriented and a very fast pace of change,” said John Hatley, general manager of market innovation in North America at Finland’s Wartsila (WRT1V.HE).
Cargill says it does not expect to have many new-build ships in its fleet for the time being, instead fitting energy-saving devices to older vessels and extending their use while future technology is still uncertain.
According to Clarksons, such devices are installed on more than a fifth of the world’s shipping capacity.
Flettner rotors, tail spinning cylinders that act like sails and allow ships to throttle back when it’s windy, or air lubrication systems that save fuel by covering the hull with small bubbles to reduce friction with seawater, are examples of devices.
While energy-saving devices can help reduce emissions, newer vessels are a better bet, according to Peter Sand, analyst at shipping and air cargo data firm Xeneta.
“The next generation of fuel oil ships will be much more carbon efficient, able to transport the same amount of cargo while emitting half the emissions that they did a decade ago,” he said.
THE PRINCIPLES OF POSEIDON
Shipping companies will face increasing pressure to meet IMO targets, which will rate ship energy efficiency on a scale of A to E, because the ratings will have an impact on finance and insurance.
In 2019, a group of banks agreed to consider efforts to reduce carbon emissions when lending to shipping companies, establishing the Poseidon Principles as a global framework.
According to the Poseidon Principles website, 28 banks, including BNP Paribas, Citi, Danske Bank, Societe Generale, and Standard Chartered, have committed to following IMO policies when evaluating shipping portfolios on environmental grounds.
“Lending decisions on used ships will become an issue on older tonnage,” said Michael Parker, chairman of Citigroup’s global shipping, logistics, and offshore business, adding that lenders would consider environmental factors when deciding whether to refinance vessels.
“Second-hand ships will continue to receive financing, as long as the owner is doing everything possible to keep that vessel as environmentally efficient as possible,” he said.
Shipping behemoth A.P. Moller-Maersk was an early adopter of new technology. It has ordered 12 vessels that can run on green methanol produced from biomass as well as fuel oil because there isn’t enough low-carbon fuel available yet.
The Danish company does not intend to use LNG because it is still a fossil fuel, and it would prefer to switch to a lower carbon alternative immediately.
Meanwhile, Wartsila plans to launch an ammonia-fueled engine next year, which it claims is generating a lot of interest from customers, as well as a hydrogen engine in 2025.
According to Wartsila’s Hatley, ship owners are facing a lot of uncertainty about how to “future proof” their fleets and avoid regretting investment decisions now in a couple of years.
“They’d rather wait for the ship’s entire 20-year life, but that’s even more uncertain now because of the rate of change.”