by Mark Williams, Managing Director, Shipping Strategy, a member of the Solis Marine Alliance
Posted on: 7 February 2022
This is going to be a seminal year for shipping’s energy transition. Momentum has been building in regulatory, technical, shipbuilding and commercial arenas and we will witness market mechanisms and new tech gain real traction this year. It’s time for a few predictions, from the dead-certs to the hare-brained. Here is some of the issues which could fill your inbox in 2022.
Ship operators now have less than 12 months to prepare for their introduction into the EU’s Emission Trading Scheme. This is going to dominate discussion in the same way that the Y2K bug, the single-hull phase out and the lower sulphur cap all have during this century of ever tighter regulations. Perceived injustices will be aired. A spotlight will be shone on potential loopholes. The utility of creating entrepots just offshore from EU waters will be hotly debated (and no doubt encouraged by the UK government). The practicalities of the phased approach may be moot, but by the end of this year, ship owners will have to come up with some form of mechanism for passing on the cost of their emissions to charterers, who will have to pass on the cost to their customers and, eventually, to you and me.
You may also notice the development of China’s carbon market, which is expanding from power, steel, chemicals, aviation and paper to include building materials and non-ferrous metals in 2022 and oil refining from 2023. The carbon price in China is currently around USD 10 per tonne of CO2 compared to around USD 90 in the EU but it is only going to go up.
Step forward the price reporting agencies – the Baltic Exchange, S&P Global, Freightos and others. Will they be able to alight on a single number to report the carbon tax element of freight? Martin Crawford-Brunt, ex CEO of Rightship, has joined the Board of the Baltic Exchange as its carbon lead with the task of coming up with just that number. You can listen to him discuss the challenge in the first of my Ship.Energy podcasts this year.
2022 may be the year in which the Coronavirus pandemic finally recedes, as we have all either been vaccinated, have recovered, or succumbed to the blighter. There should be a step-change up in GDP and in trade levels, barring political interference. But there will also be more inflation as supply-side bottlenecks may be slow to clear. Inflation will encourage investors to consider “Real Assets” as a hedge. This will support second-hand ship values at a time when more polluting, less efficient, older vessel values might be expected to depreciate faster with the EU ETS hoving into view.
The shipyards enjoyed a bumper crop of 500 container ship newbuilding orders last year, of which around 25 per cent came with some form of low-carbon fuel capability. Orders for bulkers and tankers were at lower levels as some supply -side discipline was maintained. I predict that this discipline will continue in 2022 as owners continue their wait-and-see attitude to ordering ships with low-carbon fuel technology, except where they have a charterer-led incentive to do so via long-term charters. Keen as they will be to limit their Scope 3 emissions from their supply chains, charterers will support more newbuildings with long-term employment. I therefore predict that the percentage of newbuildings ordered this year with low-carbon fuel tech will rise to between 40 and 50 per cent of the total.
The low-carbon fuel is on its way to market, and this year will be laced with announcements. 2020 was a bumper year for new methanol production around the world. The Ningxia Boafeng Energy Group 6,600 tonne per day methanol plant opened in China. The Kaveh plant in Iran opened, with capacity of 7,000 tonnes per day, while the Port Lisas plant in Trinidad achieved 5,000 tonnes per day. Last year did not see anything open on a similar scale, largely due to delays caused by the pandemic. This year may be different. Energy companies and industrials are engaged in a dash for renewables of all flavours – methanol, ammonia, hydrogen in a variety of forms, biomethane, and synthetic fuels. A tidal wave of chemical plant openings is coming. This will shift the economics further in favour of renewables and away from hydrocarbons as economies of scale are realised.
At the same time, lone scientists working in home workshops and start-ups on light industrial estates, funded by local government, venture capitalists. local industrialists or even global corporations, are beavering away around the world coming up with new ideas for more efficient hydrogen production, better energy storage, synthetic fuels, hydrodynamic coatings, and direct air capture of carbon dioxide. Some of this tech will find its way into the transport space perhaps as early as 2022, making it available for shipping at some point in the near future.
Finally, what of the older, less efficient, more polluting ships? Will we see a rise in demolition volumes in 2022? I think it’s unlikely if we have any kind of recovery in tanker markets, and if bulk and container markets continue to offer decent returns. To cut emissions, owners simply have to slow down. Very roughly, a ship uses a third less fuel at a fifth slower speed. Slow down from 12 to 10 knots and save a third off the fuel bill while cutting emissions by a third too. Moreover, slowing down reduces the effective supply of ships. A charterer seeking vessels to meet a laycan will have a smaller pool of vessels able to meet the laydays without speeding up. Ship operators’ profits will rise.
Many people find it hard to place events precisely in time over the last two years. Lockdowns have played tricks with memory. 2022 promises to offer plenty of memorable events to lodge more precisely in our memories. Maybe even some of these predictions will count among them. Let’s check in January 2023 and maybe laugh at just how wrong I was.
