There has been a lot of discussion about the chaos and confusion that may ensue following the imposition of the global SOx cap in 2020. With the choice of fuels still a bewildering decision for most shipowners to make, settling for the wrong choice could possible be disastrous. This is a subject that features strongly in the ShipInsight Conference taking place later this year.
One of the unintended consequences of the 2020 SOx cap and the different solutions that shipowners are adopting to meet the requirements is that the desired level playing field so often demanded by those same owners could well become a thing of the past. Nowhere will this be more so than in the container trades and especially the Europe to Far East sector.
Over the years, the operators in the liner trades have often been accused of anti-competitive practices and collusion in setting freight rates. There is evidence that the lines have sometimes acted in unison when attempting to increase rates but the idea that freights should show a wide range variance between operators is flawed.
That is because on the whole, the ships in the fleets of the different owners have been similar in size and power even if there has been a constant leapfrogging in terms of the latest generation of mega container ships. With fuel, port costs and capital costs all being almost identical for every one of the major operators, it is little wonder that freight rates too should reflect that and be on a similar level.
In the past, liner operators were able to protect themselves and their customers to some extent by joining conferences. Although the strict price setting of conferences could be viewed as uncompetitive it did at least ensure that a level of income for each operator enabled the trade to be protected from sudden shocks caused by the failure of one or more operators and the ability of survivors to make rapid price hikes. The modern alliance method preserves some of the benefits but as can be seen from the failure of Hanjin and the increased levels of mergers and acquisitions, it also reduces the choice for shippers.
Until the 2020 change occurs, most of the major players in the container trades will be operating under the same conditions, running on HFO and without the need for any abatement technology or fuel choices except in ECAs but even there the same conditions will apply to all players equally. However, at some point after 2020 this uniformity and hence the level playing field will cease to apply.
It is all very well for shipowners’ organisations to cheer the recent decision by the IMO to effectively ban the carriage of non-compliant fuels for use on board as a victory for fair play and the level playing field, but the final outcome will depend upon how flag and port states deal with ‘offenders’ who might legitimately be able to claim protection due to non-availability of compliant fuels.
Fuel choice and future competitiveness
Different interpretation of the rules could see some ships delayed in ports where fuel is unavailable or in short supply while competitor vessels remain free to sail on. No serious operator could build a future strategy on running with non-compliant fuels but the possibility to legally do so may affect the fortunes of other operators.
It is however, in the long-term choices that the question of competitiveness becomes far more important. Taking the choices of the big three European liner operators as an example, each appears at this stage of the game to have opted for a different strategy to meet the post 2020 rules.
Maersk has talked down the possibility of fitting scrubbers and although it has said that LNG may play a role in the future, it has so far pinned its colours to the mast of running with compliant low-sulphur fuels. It is less certain if this means MGO or one of the proposed alternatives now in the final stages of development.
MSC has chosen the scrubber option for its newbuilds while CMA CGM has taken the brave decision to go for the LNG route. Hapag Lloyd and UASCO are running with LNG-ready ships and there is some anecdotal evidence to suggest that many of the new-builds on order are being built scrubber-ready if not without the actual equipment being part of the contract price.
Operators such as Maersk, pursuing the low-sulphur option will have almost no capital outlay but will probably face a premium on fuels compared to HFO. MSC will be faced with a bill upfront for its scrubbers but as a percentage of the cost of a new vessel this will be in the low single digits and possibly recoverable within a very short period when the ability to run on cheap HFO at all stages of the voyage is taken into account. CMA CGM will also be faced with a higher capital cost, but these vessels too will not need to switch fuels. How long the payback period for the extra equipment will be is an unknown as the price of LNG as a fuel has not yet been established.
Unlike the time when all ships ran on HFO and costs were comparable, the three different strategies all allow for divergence in the fuel and running costs of competing ships. In such a highly competitive sector, the smallest differential could destroy the idea of a level playing field and give a huge advantage to one or other strategy.
The cost of fuels and the capital outlay for equipment will be known variables in the future, so whether the fortunate operators will be able to take full advantage remains to be seen. Anti-trust rules may require such owners to reflect their lower costs in their freight rates rather than letting them charge at similar levels to their rivals with higher costs. That may drive traffic towards them but that is something that is never guaranteed.
All the major operators do of course charter in tonnage and while some will want such ships to be similar to their owned fleet, others may prefer to spread their bets by opting to charter ships that will allow the operator to take advantage of different fuels.