Are climate protection measures an unaffordable luxury in a recession? Read about the effects of the corona crisis on global green shipping attempts.
The coronavirus has hit the global economy so badly that leading economists are calling it the worst-ever crash. From the devastating collapse of US stock market prices in October 1929, the Great Depression took three years to unfold; this time round, a downturn of similar magnitude caused by the corona-induced global shutdown took just three weeks. In an article published on March 24, Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business, believes that “the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day”. The global economy has taken a massive beating, as has ocean-borne trade. What will be the impact on the efforts to promote green shipping? Are climate protection measures an unaffordable luxury in a recession?
Short-term environmental benefits
In the short term, the corona crisis seems to be having a more positive than negative effect. The global shutdown has seen fish return to heavily polluted waters, such as the canals of Venice or the Bay of Cartagena in Colombia. The air quality in some of the world’s most populous cities has improved dramatically. In New York, for example, the lack of traffic is reckoned to be saving the lives of hundreds of Covid-19 patients daily, with scientists having demonstrated the clear correlation between air pollution and the severity with which the coronavirus attacks human lungs. The dramatic decline in air traffic has quietened the skies, much to the relief of millions of people living close to airports. And of course, the global shutdown has hit seaborne trade as well. From mid-January to mid-March, for example, the measured vessel capacity (in TEU) fell by 23% on Asian trade lanes. According to the latest FleetMon analysis, we do not see a clear Coronavirus-related reduction in global vessel activity yet. But shipping activity is not the same as trading activity. How will ocean-going shipping be affected in the longer term?
Oil price hits historic low
As an international activity, ocean-going shipping was excluded from the 1997 Kyoto Protocol and the 2015 Paris Agreement, as these were national pledges to reduce greenhouse gases. But carriers had become increasingly aware of their co-responsibility for tackling climate change and the regulation issued by the International Maritime Organisation (IMO) prohibiting vessels from burning fuel with more than 0.5% sulphur content (VLSFO) from January 1 2020 onwards had met with a generally favourable reception. This was reflected, among other things, by the four-month backlog for scrubber retrofits at the end of 2019, as the demand for these environmentally beneficial installations outpaced yard capacities.
But then came corona – and the price of crude oil collapsed. WTI Crude, to take just one indicator, had been hovering around $60 a barrel for most of 2019. By March 2020 it had plunged as low as $20. The corona crisis wasn’t the only factor that drove the oil price down to its lowest levels in decades; the dispute between Saudi Arabia and Russia and Saudi plans to increase its oil production also had a negative effect. But for ocean-going shipping, the more significant factor was the huge fall in the price differential between VLSFO and the much cheaper 3.5% sulphur oil that most ocean-going vessels had been burning before the IMO regulation came into effect.
Low fuel price differential
The price of VLSFO, which some 70% of ocean-going shipping now uses, fell by 278% in Singapore during the first quarter of 2020, according to the price reporting agency Argus Media. Whereas the price differential between VLSFO and 3.5% sulphur oil was more than $400 a tonne earlier this year, it was down to as little as $50 per tonne by the end of March. This low fuel price differential will have far-reaching effects.
“Persistent low marine fuel prices will hit the fortunes of ship owners who have invested heavily to have their vessels equipped with scrubbers,”says Alphatanker, a research division of the Paris-based brokers BRS.
It costs, on average, $2.5 million to have a scrubber fitted. The low price differential for marine fuel has increased the payback time for a scrubber investment from four months to four years for larger vessels and even longer for smaller ships. Frontline Tankers, which had invested heavily in scrubber technology, says the payback from earnings on scrubber-fitted vessels in its fleet fell within three months from $400 to $100 a day. Scorpio Tankers’ CEO Robert Bugbee puts it like this:
“If you had the choice to postpone a scrubber fitting, I think most companies would do that at the moment.”Robert Bugbee, CEO of Scorpio Tanker
Scorpio had been one of the most enthusiastic supporters of this sulphur abatement technology and over half its fleet is already equipped with scrubbers. Dry bulk and containership owners were among the first to scrap plans to retrofit or install scrubbers, according to Alphatanker, and their researchers forecast a flood of cancellations in the second quarter of 2020, as the carriers need to cut operating costs and the low fuel price differential makes sulphur abatement technology financially punishing.
Are climate protection measures an unaffordable luxury in a recession? Historically, this was often the case. For ship owners and operators reeling from the global recession, the current Greater Depression is likely to be no exception. The IMO regulation was certainly well-intended and initially appeared to be having a positive climate impact. But now there are justifiable fears that green shipping will be one of the innumerable victims of the corona pandemic. FleetMon will keep you updated on the topic.