There may be trouble ahead

Malcolm Latarche
Malcolm Latarche
ShipInsight

21 December 2018


Predicting what might happen over the course of 2019 is not the easiest of tasks. There are many certainties of course with regard to already announced events. For example, the rollout of mandatory ECDIS should be completed by 1 July next year as this will be a full year after the last category date and affected ships would have been required to undertake their annual survey in the intervening period.

It is also known that by the end of April, all EU-flagged vessels over 5,000gt and other flagged vessels of the same size that have called to EU ports in 2018 will need to have completed the first full year of monitoring recoding and verification of CO2 emissions. Likewise, other vessels not affected by the EU rules will need to start a similar process under IMO regulations.

Fuel availability and choice - the big question

Predicting less certain things carries an element of chance and the very real possibility of being proved wrong in 12 months’ time. What for example will the IMO do if it seems at some point in the year that they were wrong about availability of 2020 compliant fuels. For sure there will be sufficient LNG to fuel ships that are able to use it, but whether distillate production can be ramped up (perhaps three fold will be necessary since distillates currently account for just a quarter of all marine fuel) or new types of fuels available in sufficient quantity for ships without scrubbers is questionable.

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Very probably, the IMO will have to lay down some interim rules to cover such situations. There is already an element of that in place but there is vagueness about how much non-compliant fuel a ship will be allowed to take on. Is it just enough to reach the next bunkering port, enough to complete the contemplated voyage with sufficient margin for safety? And what must be done to any non-compliant fuel that remains on board once the ship is again able to bunker with compliant fuel – can it be used or must it be pumped ashore and new fuel taken? It is even possible that despite protestations to the contrary, the IMO will decide on a moratorium on enforcing the rules until the situation about availability becomes clear.

A major influence on choices will be the price differential between HFO and distillates and of course the price for alternatives. At this time last year, crude oil was at $65 per barrel while this week the cost of WTI is below $50 and Brent Crude is heading in the same direction. Both were above $80 earlier in the year. A lower crude price usually equates to a lower differential but since demand for distillates will soar and residual demand plummet in response, the old relationships between prices will be broken.

The disconnect may be even more affected by the very fact that shipping will be taking distillate fuels away from shore users. With limited possibilities for getting more distillates out of each barrel of crude, that must mean that either the competition between ships and shore users will push the price of distillates higher or more crude oil will have to be processed to satisfy the increased demand. Taking the latter course will mean there will be more residuals available for a shrinking demand base thus pushing down the price of HFO.

It is possible though to predict that the initial trickle of owners opting for scrubbers is likely to turn into a torrent if those with scrubbers are seen to be gaining a competitive advantage. Even if there is a shortage of equipment and installation capacity through 2019, it would seem certain that some owners will merely wait until the rush has passed, bite the bullet and run on distillates until a scrubber can be obtained and fitted.

On the other hand, we would also predict that some ports and states will be following the example of Singapore and introduce restrictions on open-loop scrubbers. There may be disputes over the science behind restrictions, but owners may be engaged in an uphill struggle to get their views accepted.

Almost certainly, ShipInsight will be reporting on a number of new fuel products throughout the year given that many major suppliers are already in the process of finalising production plans. We can predict also that class societies, engine makers and more will be busy testing compatibility with engines and miscibility of the fuels. On the downside, we might expect that some of the pioneering owners will suffer problems even before the deadline arrives.

High tech power and autonomy

Having seen just a few pioneering fuel cells making it on board ships since they were first mooted, we wouldn’t expect many more to be added over the course of 2019. That the concept has merits is not in doubt but unlike batteries which arrived around the same time, advances in fuel cell technology vis-à-vis shipping have been almost non-existent for the last decade.

There are plenty of projects looking at fuels cells and maybe something will move forward in 2019 but not, we predict to the point where there is a major breakthrough. In any case, there are matters to be resolved around regulation for fuel systems before anything can proceed from purely local projects to ships engaged on international trade.

We know that there will be more autonomous ship tests in 2019 but it would take a brave man to predict that interest from shipowners will be anything other than curiosity. As with e-navigation, the impetus is coming more from outside of shipping than within.

Ballast treatment

On the ballast treatment front, we can be pretty sure that the eight systems currently awaiting type approval from USCG will be given the nod at some point joining the 15 already approved and that several more system makers will be applying over the course of the year. This year the revised G8 type approval process becomes effective in October but we would expect many systems with existing type approval to be re-tested to the new standard through the year because in a very short time the older systems will no longer have IMO type approval..

After that we predict the shake out of the market will begin with some makers recognising that they are lame dogs and unable to survive. Certainly those systems that have US approval and the revised IMO approval, or are very close to getting both will have the advantage of being able to offer future proofed systems to the market. Perhaps a last-minute fire sale will be on the cards by makers being forced out of the market and desperate to recover some funds.

Geopolitics and the bigger picture

Probably the easiest thing to predict is that there will be a continuing of the overcapacity in many trades. Container ships look the most vulnerable due to a continuous stream of new arrivals at a time of slowing or stagnant growth. Some of the overcapacity may well be shaken out by choices made to comply with the 2020 rules. In a fragile market, making the wrong choice may well be a matter of life or death. The first signs of weakness may appear towards the end of 2019 when the directions of freight rates and fuel costs become clearer.

Yellow Vests

2019 will certainly be the time when owners have to face up to impending challenges and we predict that scrapping will accelerate throughout the year. Owner s will not likely use the capital raised for buying new ships but for preparing the remainder of their fleet to meet the challenges of 2020.

The geopolitical situation around the globe is very fluid at the close of 2018. Most attention has been on the trade war between the US and China and although the last week seems to have seen a softening of the rhetoric it is by no means over. The effect of the tariffs imposed on a whole range of products by the two countries has meant that trade flows have been disrupted and new markets needed to be found.

Then there is growing evidence of a backlash by populations in Europe against both globalisation and measures designed to tackle carbon emissions. This has been brought into sharp focus by more than a month of protest by the Gilets Jaunes movement in France which has since spread to neighbouring countries. The protests in Belgium have led that country’s prime minister to resign. Although still in office both Germany’s Angela Merkel and the UK’s Theresa May have both announced they have no intention of seeking further terms in office.

Next year also sees new elections for the European Parliament taking place in May. This will be the first election since the wave of populism in Europe began. The UK will not be involved as the country is due to leave the EU in March. The growing dissatisfaction across much of Europe’s population with the EU project may not lead to further exits beyond the UK but it is very possible that the EU will have to row back on some of its pet projects.

The French protests began because of increased taxation aimed at cutting carbon emissions and if that sentiment spreads, national governments will have to follow the French example and rethink their commitment to environmental matters. Considering that the EU has been a leading player in environmental regulations on shipping, any reversal following a similar move by the US under President Trump could perhaps mean that the IMO’s direction may also change. Almost certainly this will not be in the first half of the year but may become perceptible towards the end of 2019.

For more certainty join us in London this February.