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To decarbonise shipping, we may have to kill the spot market

Mining giant BHP Group announced last Friday that it has awarded a tender to charter five bulk iron ore carriers powered by liquefied natural gas (LNG), aiming to cut greenhouse gas emissions on voyages between Australia and China by more than 30%.


The contract for five LNG-fuelled Newcastlemax bulk carriers to carry iron ore between Western Australia and China was awarded to Singapore-based Eastern Pacific Shipping, controlled by London-based Israeli businessman Idan Ofer. The contract will run for five years from 2022 when the vessels will be delivered from their shipyard in China. The contract to supply the LNG bunkers is expected to be awarded next month.


BHP Chief Commercial Officer, Vandita Pant, said in a press release, “As one of the largest dry bulk charterers in the world BHP recognises the role we play in working with our suppliers and customers to drive actionable reductions in GHG emissions across the maritime supply chain" Cyril Ducau, the CEO of Eastern Pacific, said in the same press release, “when these vessels deliver in 2022, they will be the cleanest and most efficient in the entire dry bulk shipping fleet and will be IMO 2030 compliant, eight years ahead of schedule."


That 30% reduction in GHG emissions is significant as the International Maritime Organisation has decreed that by 2025 all new ships will have to be 30% more efficient than those built in 2014. Even more significantly, The IMO has ambitions to reduce CO2 emissions from ocean going ships by at least 40% by 2030 compared to a baseline measurement year of 2008, and by at least 50% by 2050 while pursuing efforts towards phasing them out.


According to IHS-Markit data, Eastern Pacific has several LNG-fuelled 209,000 Dwt bulk carriers on order at Shanghai Waigaoqiao shipyard in China with delivery scheduled in 2021. The ships will be powered by MAN-B&W designed engines built by CSSC-MED Diesel Co Ltd (an affiliate of Shanghai Waigaoqiao via common group owner China State Shipbuilding Corporation). The engines are designated 6G70ME-C10. These are two-stroke, six cylinder engines generating 18,360 kW (24,962 hp) at 77 rpm.


The 6 at the start of the engine notation refers to the number of cylinders. The G refers to the ultra-long stroke design (they are 325.6 centimetres long). The long stroke means the engine can operate at fewer revolutions per minute, reducing energy consumption. The 70 refers to the diameter of the pistons in centimetres. ME-C refers to Man B&W’s ‘compact design’ for main engines. That means they are electronically controlled (as opposed to camshaft controlled) engines, i.e. the fuel injection timing, actuation of exhaust valves, starting valves and lubrication are all optimised by electronic controls. The 10 refers to the mark (or generation) number of the engine.


This type of engine is a ‘high pressure’ engine which injects the gas fuel into the engine at pressures high enough to eliminate methane slip, which is leakage of unburned gas fuel into the atmosphere. A number of organisations (not least the European Commission) have expressed concern that methane slip makes LNG powered ships greater emitters of greenhouse gases than fuel oil powered ships, on a ‘well-to-wake’ basis. High-pressure gas injection engines effectively eliminate this problem.


LNG powered bulk ocean transport represents the most immediately practicable means of achieving the IMO’s 2030 greenhouse gas emission reduction ambitions. The vessels being built for this project will have an economic lifespan of 25 years, which would mean they would come to the end of their lives just before the 2050 targets for GHG emission reductions enter force. By then, alternative forms of non-hydrocarbon fuel will have to be commercially viable, with experiments already under way using ammonia, methanol, ethanol, hydrogen fuel cells and batteries (you can read about all of these in much more detail – without cost – at www.ship.energy).


Today I checked IHS-Markit data to see how many LNG powered ships are currently afloat. Assuming I did the search right (I just searched for ships with ‘GAS’ as the engine type on their online database) the answer is just 153. Data from class society DNV-GL from September 2019 show 184 LNG-fuelled ships on order and around 170 in operation. Not too many newbuildings have delivered in 2020 (the lowest for decades, in fact) so the numbers are unlikely to have grown much since that estimate a year ago.


The current situation then is that there are fewer than 400 LNG powered ships out of a global fleet of cargo and passenger ships of around 80,000 vessels. The scale of the challenge the industry faces to meet the IMO’s targets is vast. Yet, given ship owners’ reluctance to be first movers (it is costly, rarely remunerative, and risky) I don’t expect a rush to order LNG engines to be retrofitted onto existing ships any sooner than I expect a rush to order LNG powered newbuildings.


In fact, unless some new technology becomes available and affordable very soon, there is only a remote possibility of ship owners meeting either the 2030 or the 2050 IMO targets without joined-up support from charterers, financiers and governments. The Eastern Pacific newbuilding project is affordable by dint of the long-term charter to BHP. Ship owners without employment, used to operating in the spot market, are not motivated to take the risk.


Even LNG bunkering has been so expensive to develop that only the largest companies, fully invested in LNG, like Shell, have been able to make it work. A Shell representative told Petroleum Economist magazine last year that Shell would not make money on LNG bunkering in the short term due to low utilisation of its infrastructure. “We are willing” said the representative “to swallow a lot of that under-utilisation because, otherwise, the market will never take off.”


That challenge is equally valid when applied to the decarbonisation agenda. Only those companies with deep enough pockets to fund decarbonisation can actuate it. Adjusting national tax regimes won’t work as most ship operating companies don’t pay tax, so any tax related solution implies restructuring the entire business model and structure of the shipping industry first. That is not going to happen by the middle of this century.


So who is going to step up to invest in decarbonising shipping? it’s big tech, big pharma, big retail and big auto from the B2C space, but more importantly the B2B industries - big steel, big energy, big mining, big trading, big transport and big power companies who will have to soak up the cost of decarbonisation in their own vast value chains, passing as little as possible of the cost onto the end consumer.


In this particular case, sincere plaudits are due to BHP, Eastern Pacific, the shipyards, engine designers, class society, naval architects, financiers and insurers who have made the project possible. But I can't help wondering about the end user of the cargo. Chinese steel mills are some of the biggest consumers of both coking coal (to make the steel) and (mostly coal generated) electricity on the planet. They are some of the most prolific CO2 emitters on the planet. What has been their contribution to the project? Or for that matter to the wider decarbonisation agenda?


It would be bad news for BHP, for Eastern Pacific, for Australia's trade balance and for workers at China's steel plants, but the best way to decarbonise the iron ore trade from Australia to China would be for China to make less virgin steel. But as we all know, that just is not going to happen any time soon, and possibly not by 2050.


Meanwhile, to justify their investment in decarbonisation, charterers who follow BHP's lead are are likely to want greater control over their investment in shipping than current spot market arrangements offer them. That control can come from existing practices like time charters and contracts of affreightment. It might also come from greater charterer influence on line-ups, voyage optimisation, routing and speed. That would mean ship owners sharing more operational data with charterers, leading to still greater charterer influence over the commercial and technical management of ships.


You don’t need me to tell you what the implications of that are for the traditional independent ship owner or for the traditional spot market. But let's spell it out. To meet the IMO's ambitions, one essential step will be to optimise the utilisation of entire fleets. Minimising ballast runs will significantly cut GHG emissions. To optimise fleet utilisation implies far greater data transparency on a per-ship basis than currently exists. That means minimising the imbalance of information which is the basis of the spot market. The implication of that is a market with less randomness in it, i.e. less volatility, more predictability, and less fun for the high-rolling ship owner of lore.


In simple terms, to decarbonise shipping, we may have to kill the spot market.

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