Rate Spike Potential – Market Commentary

[London, October 2018] — At the recent EPCA in Europe this month, all that anyone could talk about was the IMO 2020 regulations that is set to transform the industry. Many were gripping about the costs, the uncertainty, and coupled with the current weak forward global economic outlook, sentiment across Owners and industry players alike was dull. Owners especially felt that they were being squeezed from both sides. It is estimated that complying with these regulations, set to kick in 1 January 2020, will cost shipowners at least $15Bn a year.

However, Owners may be in a better position than they think. For starters, based on the current orderbook, growth in the chemical tanker sector will slow to a crawl, and based on historical scrapping levels, could potentially start shrinking from 2021. Fleet growth will be less than global GDP growth, so irrespective of the IMO 2020 regs, the natural cycle would have seen demand for space exceed supply. However, it is believed that scrapping will accelerate over the next 1 to 3 years as some Owners of older vessels would not be able to recoup the financial outlay brought about by installing scrubbers or equipment for Ballast Water Management. In fact, recent industry estimates that chemical tankers could be scrapped 5 to 6 years earlier than their natural lifespan, and other experts believe that as much as 10% of the merchant fleet could be scrapped further tipping the demand/supply fundamentals. 

It is also believed that the need to move low sulphur fuel (LSF) to where it is required may support demand for product tankers. Oil producers in the Middle East are confident that there will be enough LSF come 2020, but whether it will be available across the world’s bunkering ports is another matter. Seeing as a large number of vessels will be needed to move LSF, this could be a good opportunity for product tanker Owners.

Further upward pressure to rates will come from the general increase in bunker prices, but whether Owners choose to retrofit a scrubber or use acceptable hybrid fuels, Owner’s costs will inevitably increase. As all these factors will all be converging at the same time, it has been estimated that Owners may seek freight increases between 10-20% over the next 2 years. There has also been a recent study that suggests Owners who have fitted scrubbers will also be looking to recoup costs by increasing time-charters rates. 

It is suggested that major Owner/Operators will look to push rates upward and it is most likely that medium to smaller Owner/Operators will choose to ride their coat tails. These extra costs will have to be paid, and it is most likely that they will be passed on to the end customer.  

As a large shipping nation, Greece along with many flag states including Panama, Liberia and the Marshall Islands have been pushing for a delay to the deadline, and just last week President Trump came out in support of delaying implementation as apart from the obvious cost to the industry, he is also concerned about the wider implications of rising fuel costs across his country.

The IMO has been adamant that the 1 Jan. 2020 deadline will not be moved, but this week there will be an IMO meeting in London and on the agenda is a short extension to March 2020, which initial suggestions that this may be approved. This plan should allow vessels more time to empty their tanks of heavy fuel oil. 

So, while we have all been thinking that a normal market cycle shift was coming soon, the factors mentioned above are likely to cause rates to spike much higher.​ [October 2018, SPI Marine].