The twin prospects of increasingly challenging credit conditions and more expensive bunker fuel by 2020 are weighing heavily on today’s shipping industry, officials from the European Community Shipowners’ Associations said Tuesday.
The multinational Basel Committee of banking supervisors is trying to complete new rules for lenders in the world’s major financial centers and the shipping industry.
One of the main takeaways for the shipping industry from the ongoing discussions is that shipping, while not targeted specifically, would see tougher regulations for the models banks use to decide how much capital they can lend to shippers.
The discussion is ongoing and the new rules have been dubbed “Basel IV,” as they would succeed three previous versions.
“Basel conditions could become mandatory under EU law and that would have a tremendous effect on traditional lending and when a lot of European shipping companies are small companies,” Patrick Verhoeven, the secretary-general of ECSA, told a press conference on the sidelines of the European Shipping Week 2017 conference in Brussels.
Tighter access to credit comes at a bad time for the shipping industry. “It’s coming on top of an industry where many shipping companies are in dire straits already because of the changes in global demand and oversupply, and so forth, so it is a huge concern, and on top you get sulfur legislation coming in,” Niels Smedegaard, the ECSA president, told journalists.
“The bunker cost is 50% higher than the products you used before; you have the ballast water convention coming into effect in September this year, which will require investments in ballast water treatment systems etc.,” Smedegaard said.
“When you are already in a tough financial situation, it is difficult to go to your bank and convince them that it is a fantastic idea when they look at how your outlook for the next year or two is looking,” he said.
The European shipping sector is vulnerable to difficulty in securing financing, analysts for Monitor Deloitte said in their EU Shipping Competitiveness Study in February.
70% of the EU fleet is made up of private enterprises that rely primarily on commercial bank financing, they said. “The current regulatory framework for bank financing is already restrictive, and the Basel IV proposals will make ship-financing from banks even more scarce,” they added.
The International Maritime Organization decided in October 2016 to cut marine fuel sulfur limits from 3.5% to 0.5% from the start of 2020.
The decision will force shipowners either to switch from burning fuel oil to more expensive, cleaner fuels, or to install emissions-cleaning scrubbing equipment on board their vessels.
Bunker fuel is a major expense for shippers. How much of a shipping company’s outgoings it constitutes varies, depending on whether vessels are coastal-going or deepsea, Smedegaard said. However, “it is typically the single biggest cost,” he said.
Tightening rules on bunker fuel’s sulfur content is making this cost higher.
There is not currently a liquid spot market for 0.5% bunker fuel, making price estimates difficult. The closest is 0.1% at Rotterdam, in the European emission controll area, or ECA, which was assessed at $456/mt delivered Tuesday, while 3.5% or 380 CST bunker fuel was assessed at $307/mt delivered.
Rotterdam 0.1% ECA fuel was assessed at an average of 66% higher than 3.5% sulfur fuel over the 12 months from February 2016 to February 2017.
The costs could be even higher, said others. Bunker fuel costs globally could rise by as much as $60 billion annually from 2020 if there is strict compliance with the International Maritime Organization’s 0.5% global sulfur cap, a mass-scale shift to marine gasoil and a low uptake in scrubber technology, global consulting firm Wood Mackenzie said Tuesday.
Sulfur regulations in shipping are not a new phenomenon as they already exist in ECAs. But what makes the IMO 2020 regulation so important is that it is an “85% step change in sulfur cap from 3.5% to 0.5%, and that too applied at a global scale,” Sushant Gupta, research director for Asia refining at Wood Mackenzie said at a media briefing.
High sulfur fuel oil accounts for almost 70% of the total marine fuel demand. However, its demand in bunkering is expected to plummet from as high as 3.5 million b/d currently to as low as 700,000-800,000 b/d, largely in favor of marine gasoil, once the global sulfur cap comes into force, Gupta said.
The costs of compliance will be significant as the huge demand shift from HSFO to MGO will likely increase bunker costs up to four times from the current level, he said.
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