Financial uncertainty predicted as environmental regulations loom

In his keynote speech at the recent TMP Asia 2017 event, President and CEO of Hyundai Merchant Marine (HMM), C K Yoo, highlighted the huge impact upcoming environmental regulations will have on the future of the global container shipping industry.

TPM Asia Conference“As you are well aware, there are a series of new regulations on the way and the implications of these new regulations are expected to be significant in terms of magnitude and its applicable scope.

Starting from the Ballast Water Management regulation whose enforcement was postponed to 2019 last year, to the global sulphur limit regulations which will take effect from January 1st, 2020. Following these two regulations, new rules on CO2 emission are under discussion now, targeting 2023 as an effective date.

On one hand, we are committed to the principle of the regulations because they are enacted for the sake of the common good, that is, protection of environment.

On the other hand, we cannot help being concerned about the operational and commercial challenges, which are different from the conventional ones, as we identified too many uncertainties related to the ways of compliance to these regulations in the course of making due preparations.

A new paradigm changer is approaching where the environmental regulations are likely to affect the global container shipping industry in an unprecedented manner.

Among the series of upcoming regulations, the low sulphur compliance seems to be the most serious one in magnitude. It sounds simple, but complexity in this issue comes from the fact that there are many options available on the table and the uncertainties related to these options.

Low sulphur options – the pros and cons 

There are, by and large, three options available to comply with the requirement. Option number one is to use low sulphur fuel oil with less than 0.5% sulphur emission; option number two is to install scrubbers to old or new ships; option number three is to build LNG fuelled ships.

Let me elaborate on the pros and cons of these options briefly. 

First, low sulphur fuel oil. In recent years, as the low sulphur regulations in the Emission Controlled Area (ECA) have been tightened, shipping lines have become familiar with low sulphur fuel. So we are now well aware how burdensome financially it will be to expand the use of low sulphur fuel oil from the limited ECA areas to all over the world at all times.

As of today, the prices of LSFO or LSGO are more than 50% higher than that of HFO. Furthermore, it is very difficult to forecast the price of low sulphur fuel oil in 2020, not to mention its suppliability region wise.

Second, we have the option of installing or retrofitting scrubbers. This option enables ship operators to keep using HFO because scrubbers help to reduce sulphur emissions to meet the requirement.

But there are many drawbacks regarding scrubbers. Installation is expensive and it takes more than ten months for installation on new ships; for old ships, it requires additional dry docking; sludge handling costs may incur in the case of dry or hybrid types of scrubbers; and retrofitting on existing ships will result in the sacrifice of cargo space – the smaller ships you may operate, the more sacrifice in loadability you will suffer.

The third option is LNG fuelled ships. Since LNG fuelled engines are already widely used on shore, they are expected to be adopted in many ships in the future. Because LNG has been known as the best fuel to comply with the upcoming regulations, it has become very popular for passenger ships and cruise ships for now.

However, LNG ships have drawbacks as well. They are expensive for ship building, requiring additional investment more than scrubbers. The limitation in LNG bunkering locations throughout the world is also a problematic point. Technically, the issues related to the methane slip effect have to be resolved and the problem of cargo space losses due to bigger LNG storage has to be overcome. Again, the future price of LNG is something as difficult to predict as those of other types of fuel.

The $60 billion issue

Whatever option shipping lines may choose, it is inevitable that sizable cost and investment are likely to incur for the compliance of the requirements. 

A recent report claims that new regulations will cost annually about $60 billion and some predict even more, when the IMO’s 0.5% sulphur cap for bunker fuels kicks in.

With all these complexities, I want to suggest that we need to make every effort to address these uncertainties by continuously seeking solutions from maritime technology in cooperation with relevant authorities and maritime technology institutions with an aim to reduce the cost burden or avoid wastage in investments related to compliance.

In consideration of the relatively short period of time left for preparation, we need to double our efforts.

Different from the previous technical solutions which were commercially motivated, these new solutions are fundamentally for the common good of mankind and protection of the environment. For this reason, these technical solutions ought to be shared with all stakeholders by the parties, whoever may find them.”