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2020 shipping costs on the back of a napkin

With Jason Silber, Global Head of Ocean Intelligence, S&P Global Platts

October 31, 2017 15:52:55 EST (3:31)

The shipping sector is predicted to spend anywhere from $24 to $60 billion annually starting in 2020 to comply with new sulfur emission restrictions. Jason Silber uses some back-of-the-napkin arithmetic to break down the gigantic numbers. How much more could a single merchant ship spend on extra fuel costs? Would economies of scale help large fleets? And how could scrubbers or subsidies factor into the equation?

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Video Transcript

2020 shipping costs on the back of a napkin

By Jason Silber, Global Head of Ocean Intelligence, S&P Global Platts

Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.

The shipping sector is predicted to spend anywhere from $24 to $60 billion, every single year, starting in 2020, in order to comply with new sulfur emission restrictions.

Diesel or fuel scrubbers? Predictions of post-2020 fuel costs vary depending on emission restriction solutions

The high assessment sees diesel emerging as the most widely accepted solution. The lower figure assumes fuel scrubbers will ultimately prevail due to economies of scale. And while LNG will gain traction long-term, it will never dominate.

Let’s employ some back-of-the-napkin arithmetic to break down these gigantic numbers:

There are about 55,000 merchant ships in operation, ranging from small cargo vessels to VLCCs and gas guzzling container ships. Dividing the higher figure of $60 billion by 55,000 works out to an average annual extra fuel cost, per vessel, of over $1 million, or $3000 daily.

Again, these are averages. Running a container ship might cost an extra $40,000 per day at $200 fuel spreads. A liner fleet burning 7.5 million tons annually could incur a billion and a half dollars a year in 2020-related costs.

Assuming this liner hauls 16 million TEUs annually translates to an extra $94 per TEU. Of course the liner will try to push this cost onto the Amazons and Walmarts of the world. But what if they won’t cooperate?

It’s obvious that shipping companies face some fateful decisions. What should they do? Well, take this liner again: shouldn’t it leverage its economies of scale and choose scrubbers?

Some companies are opting for diesel, saying scrubbers are too expensive and infrastructure unavailable

You’d think, and yet big boys like Maersk and Klavenness have decided not to. Scrubbers are too expensive, they say, and onshore infrastructure is unavailable for handling the sulfur. They’re going diesel — either expecting the customer to absorb the extra expense, or hoping for higher freight rates — or both.

But if diesel spikes and a surplus of cheap high-sulfur fuel emerges, these scrubber spurners could very well come to regret their decision.

Scrubbers should also make sense for operators calling African, Indian or Mexican ports where refineries are antiquated and high-sulfur more readily available. Then again, many might risk burning the high-sulfur fuel on the open seas, scrubber-free.

Charterers could demand subsidies, while ‘scrubbered’ ships could command premium charter rates

Pure owners chartering out their fleet should probably opt for diesel since they wouldn’t be footing the fuel bill. But charterers could demand some sort of fuel subsidy to cover their extra costs. Then again, scrubber-equipped fleets could command higher charter rates since charterers would benefit from cheaper high-sulfur fuel.

Just some food for thought while trying to figure out 2020 on the back of a napkin.

Until next time on the Snapshot — we’ll be keeping an eye on the markets.

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