Like most of their peers across the globe, Indian shipping groups have remained under the weather for most of the decade. This is because the lingering overcapacity in world tonnage has kept freight rates low, alarmingly so for some segments. A UK-based observer puts the situation in perspective by saying that while the World Trade Organisation is foreseeing merchandise trade volume growth of 4.4 per cent in 2018, firmly above the post crisis average of 3 per cent, there will still remain too much unused ocean freight capacity. More and more old vessels should be consigned to ship breaking yards.
Expectedly, Fitch Ratings accords negative outlook to the global shipping industry
as “lingering overcapacity” stands in the way of any improvement in market fundamentals. The worst performer will be the tanker segment, which remains exposed to a surfeit of new deliveries since 2017, more than negating the demand growth for tanker space. As for containers, The Economist says the worse may be in store where freight rates have sunk by a third since 2008. The shipping outlook is to become worse as China and the US are engaged in a tit-for-tat tariff war that threatens to suck in other nations.
However grim the industry
working is, global agencies, including the United Nations outfit the International Maritime Organisation (IMO), have in response to growing public criticism of the shipping industry’s role in polluting the planet been prescribing corrective actions that will put a big financial burden on shipping companies.
Merchant fleets of close to 53,000 ships in the process of crisscrossing seas with over 90 per cent of world export-import cargoes are responsible for 2 per cent of global carbon dioxide emissions. But in case the industry
is not told to take ameliorative measures, its share could come close to 20 per cent of emissions by 2050.
No doubt maritime transport is found the most cost effective way to move goods and raw materials in bulk from production points to consumption centres. But what continues to sully the industry’s image is the high sulphur content of marine fuel and lax emission standards for marine engines. Irrespective of build quality, age is a determinant of fuel efficiency of a ship and its level of carbon emission.
The latest UNCTAD Review of Maritime Transport points to an ageing commercial fleet at an average age of 20.6 years at the start of 2017. It says ships flagged in developing economies are on average ten years older than the ones in developed countries. In vessel groups, the oldest are general cargo ships commissioned more than 25 years ago and the youngest are dry bulk carriers which are sailing for less than nine years. Newer a vessel, better is its fuel efficiency. Therefore, it emits much less carbon in the environment than the industry average.
Working life of commercial vessels is about 20 years. It could be somewhat longer for LNG carriers. But it could be shorter for container ships and tankers. Bigger global shipping lines such as Maersk and CMA-CGM or Great Eastern Shipping here will prefer to invest in new ships, which are fuel efficient and environment friendly instead of upgrading old ships. But times for the industry being difficult, the industry’s interest in placing orders for new ships dropped in a big way in the second quarter of 2018. As a result, the money spent on new builds so far this year is at the lowest since early 2016. This is not good news for the environment.
The International Council on Clean Transportation says if global shipping operations are treated as a country, then its carbon footprint is the sixth largest in the world, almost equal to Germany. Even while shipping continues to pollute the planet in a significant way, it was not accounted for in the Paris agreement on climate change to the disbelief of countries threatened by rising sea levels and environmentalists. The starkly noticeable omission in Paris agreement is now sought to be corrected by IMO by laying out strategies to prevent atmospheric pollution, including greenhouse gas (GHG) emissions by ships.
Ships use heavy fuel oil which is very high in sulphur content. That is why the shipping industry accounts for emissions of 13 per cent of global sulphur and 15 per cent of nitrogen oxides. Not surprisingly, IMO has announced January 1, 2020, as the cut off date for lowering of marine fuel’s sulphur content to 0.5 per cent from 3.5 per cent. As low sulphur marine oil will be more expensive, the transition will have major financial implications for ship owners. According to one estimate, if all vessels start using low sulphur fuels, then the additional burden for the industry will be around $60 billion. International Chamber of Shipping, however, says the current 50 per cent price difference between low sulphur and residual fuel will rise in the event of a demand spurt for cleaner energy 2020 onwards.
The demand rise for low sulphur but high value bunker fuel will be a boon for refiners who have so far postponed making changes in the production system because of considerable investments required in installing desulphuriser catalysts and secondary units such as crackers and visbreakers. The success of the IMO strategy will be underpinned by rapid progress in fuel efficiency of the global fleet, universal use of very low to zero carbon fuels and rapid breakthroughs in propulsion technologies. In the meantime, the maritime environment protection committee of IMO will deliberate at its next two meetings whether to further tighten the energy efficiency design index (EEDI) for new-build ships. Expect ships of the future to be powered by greener alternatives such as LNG, nuclear fuel and hydrogen fuel cells.
Ship owners will feel the pinch for everything that is sought to be done to reduce the industry’s GHG emissions by 50 to 100 per cent by 2050. In the past, every time the base of anti-fouling paints applied on ship hull got changed — first from tin to copper and then to zinc on environment grounds — paint makers passed on the incremental cost to ship owners. In their turn, shipping companies
have always found it difficult to revise freight charges accordingly. The supply-demand dynamics will remain unfavourable to ship owners because of surplus capacity. In the circumstances, the burden of extra cost involved in implementing IMO strategy will likely be borne by shipping companies.