By Mike Wackett

Investors are increasingly concerned that, with only 18 months to go until IMO’s 0.5 per cent sulphur cap regulations, container lines still have no clear strategy on how they will comply, and how the change will be paid for. This ‘wait and see’ approach is regarded as a red flag by investors who worry that the lines will stumble into the default solution, in January 2020, of burning the 50 per cent-more-expensive low-sulphur fuel oil (LSFO) in their ships without proper compensation.

Ocean carriers have a track record of rolling out surcharges to recover additional costs and, ultimately, absorbing the extra expense into their freight rate. This was the case with the SECA (Sulphur Emission Control Areas) enforced in the previous decade in the North and Baltic Seas and North American and Canadian coastlines, requiring LSFO when entering the regions.

The looming 2020 fuel issue was raised several times during Hapag-Lloyd’s first-quarter investor presentation Q&A session yesterday. CEO Rolf Habben Jansen told investment bankers that a policy decision on fuelling its 230 ships post-2020 had still not been agreed, but was likely to be decided in August. He said the carrier was “still evaluating all options”, and that “some combination” was likely.

The most expensive option to comply with the 0.5 per cent sulphur cap would be for vessels to bunker with LSFO, currently around $650 per tonne. This is around $230 per tonne more expensive than HFO [heavy fuel oil] and, with big containerships using some 100 tonnes a day at sea, the unit costs would dramatically increase. For example, in 2017 Hapag-Lloyd’s bunker bill was $1.4 billion, at an average price per tonne of $318 – just 13 per cent was spent on LSFO.

The second option is to retrofit its own vessels with exhaust gas cleaning systems known as scrubbers, and to request the same from the owners of its chartered-in tonnage. Scrubbers allow ships to continue to burn HFO, but according to Mr. Habben Jansen they would require a capex of $7-10 million per vessel to install, and scrubbers are generally not viewed in the industry as a long-term solution. Moreover, operators could face issues with the availability of HFO post-2020, and tougher IMO regulations restricting the carriage of the fuel by barge.

Hapag-Lloyd inherited 17 LNG-ready ships from the merger of UASC and thus has the possibility of compliance with IMO regulations of the third option –although accommodating LNG tanks would require the sacrifice of up to 500 container slots on its biggest 19,000 TEU vessels. And retrofitting containerships to run on LNG would appear to be out of the question, given that Mr. Habben Jansen suggested that this could cost between $20 and $25 million per ship.

On the passing-on to shippers of significant fuel cost increases after 2020, Mr. Habben Jansen maintained that “customers understood” that it was not possible for the carriers to absorb it all and that they had to pay more. However, Hapag-Lloyd and the other top-ranking carriers will be looking over their shoulders at smaller rivals, such as HMM, which has announced it will be ordering new ULCVs with scrubbers, thereby potentially enjoying cheaper unit costs from 2020.

Reprinted courtesy of The Loadstar (