Alphaliner executive consultant Tan Hua Joo tells JOC.com approximately 4.4 million TEU in container ship capacity will be taken out of service in the lead up to the International Maritime Organization’s (IMO) Jan. 1, 2020 low-sulfur fuel deadline. Photo credit: Shutterstock.com.

Shippers could see further deterioration of schedule reliability in the coming months as container lines remove vessels from service to retrofit them with scrubbers to meet a mandate requiring the reduction of sulfur content in marine fuel from 3.5 percent to 0.5 percent starting Jan. 1.

About 380 containerships with an aggregate capacity of 4.4 million TEU will be retrofitted with scrubbers to meet the International Maritime Organization’s (IMO) 2020 low-sulfur fuel mandate, according to Tan Hua Joo, executive consultant at Alphaliner. The vast majority of the global container ship fleet will burn low-sulfur fuel oil (LSFO) to meet the mandate, which will cost carriers an additional $10 billion to $15 billion in annual fuel spend, according to various estimates.

There is currently a price differential of between $170 and $320 per metric ton between high-sulfur bunkers and marine gasoil. But Khalid Hashim, managing director of Thailand's Precious Shipping, pointed out that the “high-sulfur” fuel supplied in South America had a sulfur content of between 0.2 and 0.7 percent that would mostly meet the IMO's 0.5 percent sulfur cap. He said fuel supplied in South America was only $40 more expensive than bunkers at other major refueling centers such as Rotterdam.

Schedule, capacity concerns

Andy Lane, Singapore-based partner in maritime advisory firm CTI Consultancy, told JOC.com that withdrawing vessels to have scrubbers fitted could “screw schedule reliability up a bit further and make supply chain integrity a little harder to forecast.”

On-time performance by carriers on the Asia-US trades plunged to new lows in the first two months of the year, with the all-water East Coast lane recording its sixth straight month of record lows in schedule reliability, according to the latest data from SeaIntelligence Consulting. The maritime consultancy said 2018 was the worst year for container line schedule reliability with eight out of 12 months recording the lowest level of schedule reliability since the Denmark-headquartered firm started measuring the data in 2012.

Vessels earmarked for retrofitting are among 550 boxships, totaling 6 million TEU, that are due to be equipped with scrubbers, according to figures compiled by Tan. The remaining vessels are either new buildings that are being delivered with scrubbers already fitted or the 50 ships that have already been dry-docked for equipment to be fitted.

Tan said about 30 containerships a month, equal to about 300,000 TEU, will be taken out of service for 30-40 days to have the emissions control equipment installed. The number of affected vessels is equivalent to about 1.3 percent of overall supply.

Tan told JOC.com that the impact from taking vessels out of service “should not be exaggerated” because “carriers do need to take capacity out of certain trades — Asia-Europe is an obvious one right now — and this could be timed to fit with the retrofits.”

“The problem,” he said, is that “carriers are extremely tight-lipped about their plans,” in terms of which strings and trades will be affected and for how long as vessels are withdrawn for dry-docking.

Increased interest

Tan noted that scrubber uptake has surged in recent months. Mediterranean Shipping Co. will have the largest fleet of scrubber-equipped vessels, with about 180 container ships to be fitted with exhaust gas cleaning systems. Evergreen Marine will have about 80 vessels and Maersk Line 50. Other carriers that will partially equip their fleets with scrubbers include Ocean Network Express (ONE) and CMA CGM.

“Zim [Integrated Shipping Services] is the only line which has not made its scrubber plan public,” Tan said. “Over 10 percent of the container ship fleet, or 20 percent of total capacity will have scrubbers installed by the end of 2020.”

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Tan also accused carriers of “having a complete lack of transparency in calculating the bunker adjustment factor [BAF],” the formula carriers will use to determine additional shipping charges stemming from the higher price of LSFO. He said the revamped BAF “is not a reasonable way to do the calculation, given that carriers will fit scrubbers” and the new BAF assumes 100 percent LSFO usage.

But Thomas Elling, the Singapore-based senior director for regional sales and customer service at Hapag-Lloyd, refuted Tan's transparency claim. "Our BAF is 100 percent externally verifiable," Elling said.

Jeremy Nixon, ONE chief executive, said only a limited number of its boxship fleet would be equipped with scrubbers. "We're not great fans of scrubbers. We'll have 10 vessels equipped at the beginning of 2020," he said at the TOC Asia conference in Singapore on April 9.

Carriers contend that the proposed BAFs are the simplest and most transparent way to calculate the higher costs of meeting the mandate and that calculations that would factor in scrubber usage, vessel size, and other factors affecting fuel consumption would overly complicated fuel formulas.

Tan added that “shippers will have to share the burden” in terms of cost whether carriers opt to use LSFO or fit scrubbers, with retrofitting equipment estimated to cost about $4 million each for large boxships. “Shippers have to pay. There is simply no way shipping lines can absorb the extra cost,” he said.

“A 20-year assessment shows there is a broad correlation between freight rates and fuel prices, but the downside correlation has been stronger than the upside, while longer-term freight rates have declined in real and nominal terms,” Tan added.

Contact Keith Wallis at keithwallis@hotmail.com.