Carriers unsure whether to demolish older vessels ahead of IMO 2020 regulations deadline, says analyst.
Uncertainty about how best to prepare for new IMO regulations mandating the use of low-sulphur fuels by container lines from the start of 2020 is not confined to shippers.
Analysis from Drewry claims that carriers are unsure whether to demolish older, less fuel-efficient vessels ahead of the deadline because it remains unclear how much the more expensive low-sulphur fuel oil will cost.
Under the new IMO 2020 regulations, from January 1, 2020 container vessel operators must switch to fuels with a sulphur content of 0.5%, compared with the 3.5 percent sulphur content fuels mostly used at present. Analysts have estimated the new rules could cost the container shipping industry anywhere between $10 billion and $15 billion next year depending on the pricing of the new premium fuels.
The relentless upwards charge of Brent crude this year – prices last week briefly passed $75 on the back of anticipated supply challenges before easing off – is further muddying the picture.
“Last week’s news that the US will cease granting waivers for the import of sanctioned Iranian oil will contribute to carriers’ rising operating expense in the short-term, but it is the lack of visibility into the extra fuel costs associated with IMO 2020 that is making it harder to plan much further ahead,” said Drewry.
The analyst has long predicted that IMO 2020 would trigger much greater scrapping of containerships as many older and less fuel-efficient ships will be rendered uneconomic.
“The rapidly increasing move towards fitting exhaust scrubbers could force charter rates down for some ships that are not fitted with the system, potentially swelling the number of demolition candidates,” it said. “However, owners have thus far resisted a large-scale cull that would help to alleviate the container market’s enduring over-capacity crisis.”
Last year represented an eight-year low for container ship demolitions – approximately 120,000 teu of capacity was sold for scrap, a sum that would have been far lower were it not for a surge in 4Q18 when over half the annual total was removed from the active fleet.
The heightened rate of demolitions witnessed in the fourth quarter has continued through 2019, and Drewry still expects a slight escalation in demolitions due to IMO 2020 taking annual scrapping this year to around the 300,000 teu mark, but still far lower than the analyst’s previous estimate of 450,000 teu.
“Despite this much need reduction, our demolition forecast will only account for less than 2% of the current fleet of 22 million teu,” it said.
“85% of the fleet is less than 15 years old and is therefore highly unlikely to be sent to the demolition yards. Some 10% resides in the 15 to 20 age range, of which just over 100,000 teu have either been retrofitted with an exhaust scrubber or are pending the system to be installed. Owners of the retrofitted ships clearly foresee plenty more years of revenue generation from those assets, but it would certainly help the supply-demand balance if more at the top end of the age range were to be demolished.
“That leaves about 5% of the fleet over 20 years old. Excluding the very few ships in that bracket that are fitted with or pending scrubbers that means there is currently around 1.15 million teu in low hanging fruit available to be scrapped. Owners should get a move on.
“Expect to see more containerships demolished as IMO 2020 approaches, and for the average age of scrapped vessels to reduce as the available pool of older ships is drained.”
Source: Lloyd’s
