top of page

Decarbonising C5

A Capesize Green Corridor between Australia and China is Feasible, with Carbon Tax Breaks

C5 is the Baltic Exchange’s code for the voyage from Australia to China on Capesize ships. It carriers the heaviest weight in the Baltic Capesize Index and therefore is a key component of the Baltic Dry Index, used as a bellwether by investors the world over. It is a vital trade route for a vital commodity. How hard would it be to decarbonise it? I’ve had a go at estimating the numbers and the answer is that it could be decarbonised relatively easily, with some incentives in place such as a shipping emission tax.

Big Numbers

In 2021, Australia exported 1,572 million tonnes of iron ore, while in the first four months of 2022 its exports of the red rock totalled 297 million tonnes. 98 per cent of this is shipped in Capesizes – vessels that are too large to transit the Panama Canal. A standard modern Capesize can load 170,000 tonnes of iron ore.

Newcastlemaxes, optimised for the coal loading port of Newcastle north of Sydney on Australia’s east coast, can load between 205,000 and 210,000 tonnes of iron ore. Wozmaxes – a shortening of Western Australia Maximum – can load up to 250,000 tonnes of iron ore, optimising tides and loading capacity at Port Hedland in Western Australia.

According to cargo tracking firm Oceanbolt, Australia’s iron ore exports employed 4,821 Capesize ships as well as 430 smaller vessels in 2021. In Q1 2022 the number were 1,161 Capesizes and 78 smaller ships. Lat year, 81% of Australia’s iron ore exports went to China. 7% went to Japan and 5% to South Korea. Another 2% went to Taiwan. After that there is a long tail of destinations taking tiny, sub-1% shares of exports from Down Under. The destination shares are essentially the same for 2022 to date.

According to the Baltic Exchange, a standard Capesize sailing 12 knots laden and 13 knots in ballast burns 43 tonnes of fuel oil a day. At that speed it takes 13 days to complete one laden leg from Port Hedland to Shanghai, the mid-point of the Chinese eastern seaboard. One laden leg on a standard Capesize therefore emits (at 3.11 tonnes of CO2 per tonne of fuel oil) 3.11 * 43 * 13 = 1,738 tonnes of CO2. The ballast leg takes 12 days at 13 knots and therefore emits 3.11 * 43 *12 = 1,604 tonnes of CO2. The whole round voyage, excluding port days (let’s assume the ships can cold iron in port and therefore emit zero CO2) emits 3,343.25 tonnes of CO2. Bigger Newcastlemaxes and Wozmaxes will burn more fuel but take the same number of days to complete the voyage, assuming the same average speed.

Basis 2021’s count of 4,322 Capesize voyages from Australia to China, total CO2 emitted on just that route was at least 3,343 (tonnes of CO2 emitted per round trip) * 4,322 (voyages) = 14.45 million tonnes of CO2.

If CO2 were to be taxed at USD 200 per tonne – a commonly quoted number as it is thought that it would make renewable ammonia competitive on price with fuel oil – then the total tax bill for shipping iron ore in Capesizes from Australia to China in 2021 alone would be 14.45 million * 200 = USD 2.89 billion.


Fleet Renewal

In Japan, a ship owner can avoid capital gains tax when he sells a ship for a profit, if he reinvests the money into a Japanese built newbuilding. This keeps the Japanese shipbuilding market ticking over. Could a similar idea work in carbon tax? Pay the carbon tax but get a refund of X if you invest X in a zero-emissions vessel.

A Capesize bulk carrier newbuilding would cost in the region of USD 62 to 63 million as of May 2022. Adding LNG or methanol capable engines to the specification could add USD 10 to 12 million to the cost, giving a high case of USD 75 million per ship. If a CO2 tax were implemented on the Australia-China iron ore voyage at USD 200 per tonne of CO2, the money raised would buy 38.5 new renewable-fuel Capesizes each year. According data from SeaWeb, there are 1,088 Capesizes currently in service, as well as 414 Newcastlemaxes and 70 Wozmaxes.

A CO2 tax would not therefore of itself be sufficient to replace the entire fleet in one go, but ship owners would only need to replace Capesizes as they reach the end of their economic life at about 25 years of age. In the extant Capesize fleet there is only one ship left built 25 years ago in 1997, plus two in 1998, five in 199, six in 2000 and thirteen in 2001. Fewer than 40 Capesizes are delivered in most years. Replacing these with low-emission newbuildings is relatively easy. It gets harder in 15 years or so to replace the 175 Capesizes that delivered in the year 2010 alone, plus the 174 that delivered in 2011 and 109 that delivered in 2012.

Capesize Fleet Profile: Count of Ships by Year of Delivery

Source: Shipping Strategy Ltd

Still, with incentives, by 2047, the entire Capesize fleet could be replaced by zero-carbon newbuildings. This assumes that enough renewable methane and methanol will be available to power them. It also assumes that sufficient shipyard capacity is available to build them, at the same time as all the other low-emission methanol, ammonia, gas and oil tankers, container ships, ammonia carriers, ferries, offshore ships and so on. Very roughly, to replace the entire global fleet over 25 years would require 4,000 ships a year output, which is about the level at the height of the shipping boom in 2007-08.

Testing Assumptions

This thought experiment also depends on the amount of iron ore being shipped from Australia to China staying constant throughout the 25 years needed to replace the fleet. The IMO’s ambitions to reduce shipping’s emissions is based on an assumption that shipping demand will continue to grow. But this assumption is worth testing, at least for this cargo on this route.

China’s iron ore imports peaked at 106 million tonnes in October 2021 and have not breached 100 million tonnes since, being 93 million tonnes in April 2022. China’s monthly steel output peaked in September 2021 and has fallen since. China pledged last year that crude steel output would not be higher than the 1.065 Bn T produced during 2020, a pledge that was met in 2021 as production totalled 1.032 Bn T, basis government statistics.

Steel mostly goes into China’s construction industry, which is horribly overbuilt. There are 30 million unsold apartments in China, enough to house 90 million people. Forecasts of demand for housing appear to have been overestimated, like Soviet tractor production targets. China’s population may peak as early as this year and may already be in decline, according to Zheng Bingwen, director of international social security studies at the Chinese Academy of Social Sciences. This is a full decade ahead of ‘schedule’ and comes with significant economic consequences. The ratio of pensioners to workers will pass 25% in 2030 and will reach 43% by 2050. Birth rates are not recovering from their Covid slump to 7.5 births per 1,000 people in 2021 compared to 10.4 in 2019 and 12.0 in 2015 when the one child policy was relaxed. Zheng predicts that this will lead to a decline in savings and in turn a huge decline in investment. In China, births have fallen for five years in a row – by 1.4 million in 2021 (10.6 Mn / 12.0 Mn in 2020).

Family formation will already have peaked if the population is peaking this year, or it will do soon if Zheng Bingwen is a bit premature in his estimates. In the short term, it also means that China’s plan to rebalance the economy away from exports and to domestic consumer spending is in ashes. Personal consumption peaks in the years around family formation, and those formations may already have peaked as China’s vast surplus of residential property attests.

It also means that China’s demand for steel may have peaked already, which would mean that China’s demand for iron ore imports would be more likely to vary with prices rather than steadily increase due to its urbanisation process, which is probably now reaching maturity.

In addition to changes to the fundamentals of iron ore demand in China, the government there wants to increase recycled steel’s share of its total steel consumption from 20% currently to 30% by 2030. This will cut iron ore import demand growth – practically to zero, we think – but could increase ferrous scrap imports by a factor of two to three times. Good for geared bulk carriers, less so for Capesizes.

A Feasible Scenario

Mining companies are already working hard to decarbonise mining operations. For instance, they are replacing the diesel vehicles which emit up to 80% of CO2 at mines with electric vehicles. They are already looking at decarbonising the ocean-transport element of their supply chains. BHP has time chartered a number of LNG powered Newcastlemax newbuildings from Eastern Pacific (as we have previously reported). The long-term employment offsets the higher newbuilding costs and helps the ship owner arrange finance.

One can envisage a ‘steady state’ scenario for Chinese iron ore import demand in which it basically doesn’t grow from its current level of between 90 and 100 million tonnes per month, and in which Australia’s dominant market share remains about the same. In such a scenario, with some market-based incentives around emissions taxes, an iron ore ‘green corridor’ between Australia and China becomes feasible and it is possible to decarbonise C5.

A version of this article previously appeared at

163 views0 comments

Recent Posts

See All

Li Qiang Indicates China's Priorities

China's National People's Congress speech parsed for nuggets of useful information. The Chinese National People’s Congress (NPC) happened this week. Every year, the photos of ranks of Party officials


bottom of page