BIMCO President: LNG bunkering not an option

The International Maritime Organization (IMO) Secretary General, Koji Sekimizu, opened the IMO symposium on 26 September 2013 by stressing the key role shipping has in a global sustainable development for trade and growth. BIMCO President John Denholm followed up with a speech which included the following main points: shipping is the servant of world trade, it has enabled globalisation and in so doing, contributed massively to world growth in the past. A cost-effective shipping industry is a prerequisite for world growth in the future. The astonishing thing is that the important role of shipping and the shipping industry to economic growth is rarely recognised as it should be.
The shipping industry is a truly global industry with a multitude of users as well as owners of ships interacting with each other. The barriers to entry are low and regional restrictions are limited - in short it is close to a perfect market.
Much of the credit for keeping the barriers to entry low and avoiding regional restrictions lies here with the IMO and it is important that IMO does not let up on this work as it is “being close to a perfect market” that ensures the industry adjusts to the changing demands of world trade.
In the late 1990’s, world trade became a very demanding master as the Asian economies and in particular China began to grow rapidly and western economies outsourced more and more manufacturing to Asia.
There were not enough ships to meet these new requirements and so freight rates rose. Ship owners reacted to the increased freight rates by building more ships and as a consequence, shipyard capacity became in short supply and the price of new ships rose rapidly. The shipbuilding nations responded to the opportunity by increasing their yard capacity.
It was an extraordinary time:
•    The owner of a Capesize bulk carrier – the type of ship that typically carries iron ore and coal – once said to me that when he came into the business, he was pleased to get a charter rate of USD 12,000 a day and he was now looking for USD 12,000 an hour.
•    The cost of building a Capesize ship rose over three-fold from around USD 40 million to USD 120 million.
Great fortunes were made.
Then, five years ago, came the collapse of Lehman Brothers, which marked the beginning of a loss of confidence and the global recession hit hard.
•    It was soon obvious there were too many ships for the available cargoes and charter rates fell sharply – in many cases to less than the cost of operating the ship.
•    Market values also collapsed, so that a newly-built ship was worth what it had been before the market took off.
Great fortunes were lost.
Today, it is estimated that across the bulk carrier and tanker fleets, there is about 20% more tonnage than is required. This a huge surplus and while part of it is due to the slowdown in world trade, it is at least partly due to ship owners building more ships than were necessary.
Much of this surplus is being dissipated by slow steaming and a little tonnage is laid up, but the surplus is there.
As a consequence of the period of rapid growth the world fleet is probably younger than it has ever been in my lifetime, but there are more ships than necessary to carry the available cargoes and as a consequence, as you would expect in a “near perfect market”, charter rates and ship values are low.
As expected, this has led to an increase in the amount of scrapping, but contrary to what you would expect, there is still a big flow of newbuilding orders.
To understand why this is the case you have to look at the state of the ship owners rather than the market.
To understand the state of the ship owners, imagine the aftermath of a party.
•    It had been a big party in which the alcohol had flowed freely and it is now 7.00 in the morning when you survey the scene.
•    The room is chaos, with bodies all over the place, some slumped forward in their chairs other lying on the floor then in the corner of the room is a group of people having breakfast
•    The first thing that strikes you is that amongst the bodies are a number of waiters who quite clearly had joined in the party – this is what happened with a number of banks
•    The second thing that strikes you is that there is little sign of life among the bodies and those that are showing life are clearly distressed – these are the owners who threw caution to the winds and enjoyed the boom to the full
•    Finally, you engage with the people in the corner who seem unaffected. This is because they were the people who paced themselves or left the party early – the ship owners who sold out as the markets improved and people who were not at the party – new investors in shipping.
The people who are ordering the new ships are this latter group who, unaffected by the collapse in ship values, see the opportunity to exploit the new demand for world trade to reduce costs by ordering fuel-efficient ships. They are not affected by the lack of waiters, as the breakfast is a buffet!
So how does all this affect the sustainability agenda which sets a number of actions such as:
•    Becoming a more responsible partner in the communities in which shipping operates;
•    Providing a safe, healthy secure and rewarding work environment;
•    Diversifying the industry’s energy mix;
•    Ensuring greater resource efficiency to make a dramatic reduction in the greenhouse gases;
•    Ensuring responsible governance of the oceans.
Well, I have to be honest and say for many ship owners (the bodies lying around the room) the only sustainability agenda they are interested in is creating a sustainable future for themselves by surviving.
Putting these cases aside and focusing on the group of people having breakfast, in the course of the great party a great change in the market place took place in that the price of a barrel of oil moved from USD 20 to USD 100. This is a staggering change and means that in todays market the cost of supplying a ships with fuel is way in excess of the amount the ship can earn on the market.
Our friends having breakfast have realised this and see an opportunity to capitalise on the situation by ordering new some of the new generation of ships in order to improve their energy efficiency.
Indeed, market forces are now strong enough to make the industry as energy-efficient as is realistic without the need to impose any market-based mechanism to achieve this aim.
BIMCO also believes that in looking at energy efficiency, it is important that the world looks at the consumption of each ship and not the industry as a whole, as if they look at the industry as whole, they will inevitably restrict the industry from being able to respond to the demands of world trade.
As regards other aspects of the sustainability agenda, let us first consider the environment.
The shipping industry has no difficulty in supporting the aim of becoming a more responsible partner in the communities in which it operates, provided this is implemented on well thought through and a globally agreed framework that is established through IMO.
I, like most other ship owners, have no desire to pollute the waters of one part of the world with “bugs” picked up in ballast water from another part of the world or to see the tell-tale signs of acid rain caused by sulphur emissions. But, and it is a big but, in both these areas we have in place legislation that, while well-intentioned, is ill-advised.
The Ballast Water Convention, for instance, was put in place before the technology to meet its requirements existed and without regard to the practicalities and cost of retro-fitting equipment in the world fleet. BIMCO is, of course, pleased that IMO has recognised the need for a smoother implementation process than had been originally intended, but does not feel that the proposals go far enough, as even in the slower implementation process there is likely to be a problem due to the availability of equipment and yard capacity, and in the current market, it simply will not make sense to retrofit an old ship with a ballast water treatment plant and so ships will be scrapped earlier than necessary.
Another example is sulphur emissions, where the global limit of 0.5% on the high seas by 2020 is, in the absence of stunning developments in scrubber technology, going to require ships to burn low sulphur content fuel. For the vast majority of ships just now the only low sulphur fuel they can turn to is marine diesel, as LNG is not an option, firstly because of the lack of an LNG distribution network and secondly because it is not economical to retrofit a ship to burn LNG. This means that for most ship owners, low sulphur fuel means marine diesel.
If the industry switches wholesale to marine diesel, two big questions need to be answered:
•    Will marine diesel be available in sufficient volume to satisfy the appetite of the shipping industry?
•    What are the refineries going to do with the high sulphur content fuel that comes off the bottom of the tower if they cannot sell it to the shipping industry?
Of course the industry is reassured that IMO is going to carry out an availability study before 2020 and we think it is a good idea to start work on this now and suggest that it is something that should have been done before the legislation was passed.
BIMCO is firmly convinced that impact assessments should be carried out before any legislation is introduced and is pleased that the IMO has signalled that it will not bring in any legislation to control Greenhouse Gases without undertaking a full impact assessment first.
I am, of course, digressing from the subject of the state of the shipping industry, so let me wrap up by saying that while the world fleet is younger and more modern than it has been in recent memory and is in good shape, there are too many ships on the seas and because of this, the earnings of ship owners have fallen to levels that are unsustainable.
The glut of newbuilding orders, driven by the desire of the owners who have emerged from the financial crisis with strong balance sheets to capitalise on the new fuel efficient designs, is undoubtedly going to mean that earnings are going to remain depressed for some time yet.
Therefore, while the ship owner has no difficulty in supporting the concept of sustainability, few owners are in a position to bear the costs of the sustainability agenda.
Source: BIMCO