Dry bulk fleet faces struggle to pass on sulphur cap costs
Environmental regulation has always been expected to spur on vessel scrapping and therefore affect the growth of the global fleet. But in the case of the dry bulk market, which is already hampered by tariffs and slowing Chinese growth, demolitions could be important in the sector’s fortunes.
BIMCO and Drewry at odds about how demolitions will unfold next year — and the growth of the dry bulk fleet.
DRY BULK vessel operators face difficult negotiations with customers over increased costs from the sulphur cap, according to BIMCO chief shipping analyst Peter Sand.
The underlying market balance “is extremely weak at the moment”, he told a panel at TOC Europe Conference in Rotterdam. Shipowners will have to contend with either high costs for 0.5% sulphur-compliant fuel oils or capital expenditures from the installation of scrubbers to keep burning the cheaper high-sulphur fuel oil.
Passing on costs would much easier if freight rates were significantly higher and the costs of fuels therefore accounted for a much smaller share of the total costs.
But lower freight rates that are underpinning the market and which will likely remain low do not afford operators that luxury.
“I would love to see freight rates [rise] but we are in a massive overcapacity and there is no new China around the corner,” said Mr Sand.
Drewry technical lead Leticia Astudillo said the spread between high-sulphur fuel oil and the new very-low sulphur fuel oils is expected to be $200 in 2020, after which it will decline.
Boxship operators experienced first-hand some of the challenges of passing on the upcoming costs last year, when they announced .
BIMCO and Drewry disagree on the extent to which the sulphur cap will affect the growth of the dry bulk fleet because of divergent views on its impact on vessel demolitions.
Ms Astudillo said that the sulphur cap and the ballast water management convention, which also requires hefty capital expenditure for all vessels during the next five years, will increase demolitions and will drag the fleet growth, in combination with a very low orderbook.
Under Drewry’s most likely scenario, the dry bulk fleet will increase by 2% in 2019 and just 1% in 2020, she said.
“That slow growth is even slower if we take into consideration some vessels being taken out for retrofitting of scrubbers,” she said.
Mr Sand said that BIMCO expects lower demolition rates than Drewry and does not expect scraping to help the ailing dry bulk market.
“We would love to see it, but it is not our baseline,” he said.
BIMCO has previously forecast a 3.1% increase in the fleet in 2019 and 3% in 2020.
Mr Sand said he does not expect any improvement in the balance of the dry bulk market this year.
“That may be the understatement of the year because we think it will go down — the market this year and the next-predominantly because of the fleet growing too fast,” said Mr Sand.
Ms Astudillo acknowledged that while Drewry is expecting these historical lows in the dry bulk fleet growth, demolition rates have recently fallen as shipowners are cautious because of uncertain charter rates going forward.
“If this trend continues then the demolition will not be as high as we believe the base case is,” she said.