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Would shipping speed limit spur emission cuts, ‘haywire’ markets or both?

PHOTO COURTESY OF SHUTTERSTOCK

The idea of a global speed limit on ocean shipping is not new, but there has never been more momentum behind it than today. If it actually happens, implications for the industry’s economics would be enormous.

A speed limit designed to reduce carbon dioxide emissions will be debated at a meeting of the International Maritime Organization (IMO) on May 13-17.

Countries including Belgium, Finland, France, Germany, the Netherlands, New Zealand and Spain have endorsed the concept of “regulation of ship operational speed” in a co-sponsored submission to the IMO. Another recent IMO submission endorsing the idea was made by the Clean Shipping Coalition.

Garnering the most headlines, a letter endorsing speed limits was sent to the IMO on 30 April by a group of 113 shipping companies. The letter called for the enforcement of “mandatory regulation of global ship speeds differentiated across ship types and size categories.”

“Our preference would be to set maximum annual average speeds for container ships, and maximum absolute speeds for the remaining ship types, which take into account of minimum speed requirements,” said the letter, adding, “Such a regulation should be implemented as soon as possible and the obligation of compliance should be placed both on ship owners and charterers.”

Who signed the letter?

To put this letter in perspective, and to understand who the shipping signatories are and what proportion of the overall market they represent, FreightWaves analyzed data on ownership and fleet size provided by Lloyd’s List Intelligence, together with data published by the companies. While the information is broken down below, the bottom line is this – all of the ships of all of the signatories account for less than 5 percent of the global merchant fleet.

The data analysis reveals that the signatories are highly concentrated in the Greek bulk shipping community. Of the 113 companies (several of which have shared ownership), 82 are Greek, representing 73 percent of the total. Weighting the mix by the number of ships in the fleets of the signatories, Greek ships account for 66 percent.

German shipping interests account for 11 percent of signatories and 17 percent of the ships. Remaining nationalities account for the final 16 percent of signatories and 17 percent of vessels.

“ I doubt regulators intend to put constraints on ships that result in charter markets going haywire, although I don’t think we would complain if that happened”

— Anthony Gurnee, Ardmore Shipping

There are several high-profile names on this list – the Martinos family’s Eastern Mediterranean Maritime, Germany’s Peter Döhle Schiffahrts, the companies of the Prokopiou family, and public companies including tanker major Euronav, Petros Pappas’ Star Bulk, Polys Hajiouannou’s Safe Bulkers, Harry Vafias’ StealthGas, Angeliki Frangou’s Navios Holdings, and Tor Olav Trøim’s 2020 Bulkers.

But most of the owners signing the letter possess very small fleets, and there are more ‘marquee’ companies that are not on the list than on it. The average fleet size of all the signatories is 20 ships. Of the 113 companies, 76 had 20 ships or less, and 53 had 10 ships or less.

Dry bulk ships represent 34 percent of the fleets of the letter signatories, mixed fleets (weighted heavily toward dry bulk) 36 percent, tankers 14 percent, containers and general cargo ships 9 percent, gas shipping 6 percent, and other vessels 1 percent.

Slow speed = less capacity

If vessel speed was mandated to be slower, it would theoretically be positive for both charter rates and vessel values. The slower the speed, the less effective vessel supply is on the water and available for employment. Slowing speed by 10 percent is the equivalent to putting 10 percent of the fleet in layup (analysts have referred to slow steaming as ‘virtual layup’).

The less capacity, all else being equal in terms of demand and bunker pricing, the higher the charter or spot rate. As rates increase, vessel values increase, because the current value of assets should equal the discounted cash flow of their future earnings stream. In such a scenario, the biggest financial beneficiaries could be shipping’s ‘buy low, sell high’ asset players – a category dominated by Greek owners.

“If the container ships are forced to go slower, liner companies would have to put additional vessels on the strings to maintain the same service levels for customers.”

The slow-steaming supply effect was cited during two recent quarterly conference calls for analysts, by Euronav (NYSE: EURN), which did sign the IMO letter, and Ardmore Shipping (NYSE: ASC), which did not.

Euronav chief executive officer Hugo De Stoop commented on April 30, “Everybody understands it will reduce [vessel] supply, so the market needs to make sure that the supply that remains after adapting the speed is enough for the demand.” He insisted that cutting speed would “dramatically” reduce shipping’s carbon dioxide emissions and pointed to growing “momentum” for the plan.

The following day, Ardmore chief executive officer Anthony Gurnee was asked by an analyst about the letter and responded, “We’re not signatories; however, we’re very engaged in discussing ways to meet [emission reduction] targets.

“We think the various technology-driven solutions are going to come later, which is why people are realizing that operational methods [such as slow steaming] are the way to go early on. It’s an interesting idea and we think it’s a pretty sensible component of an overall longer-term solution.

“But obviously, when you slow down ships, you’re essentially reducing effective supply and that has consequences for the market. I doubt regulators intend to put constraints on ships that result in charter markets going haywire, although I don’t think we would complain if that happened.”

In other words, companies like Ardmore – as well as the companies that signed the IMO letter – could stand to financially gain if such a rule caused rates to go haywire.

The economics of speed

From a shipping economics perspective, vessel speed plays a vital role as an ‘accordion’ of shipping capacity, helping to smooth out the rate cycle for cargo shippers. When demand slows, ships slow down to save on fuel costs. When demand rises, rates rise, ships speed up to take advantage of the market, and by going faster, they create more effective capacity, which dampens the rate increase.

The shipping companies’ letter to the IMO makes the same point on the correlation between market strength and vessel speed. It states, “Recent history shows that reducing the global fleet’s operational speed after the 2008 economic crash led to dramatic reductions in GHG [greenhouse gas] emissions. This speaks to the real-world effectiveness of a potential prescriptive speed measure in helping achieve reduction targets.

“However, recent studies also suggest that ships are speeding up again as global demand recovers. Should this trend continue, any GHG gains from slow steaming over recent years will disappear.”

Opponents of shipping speed limits will likely use basic concepts of shipping economics to argue against the plan, on the premise that it will lead to more ships on the water, which will lead to more GHG emissions.

In the container shipping sector, a liner company must use a certain number of ships on each service ‘string’ to ensure scheduled service (usually weekly) between point A to B. If the container ships are forced to go slower, liner companies would have to put additional vessels on the strings to maintain the same service levels for customers.

This would increase demand for vessels from container-ship lessors, raising charter rates, and thus asset prices, which, if they went high enough, would spur newbuilding orders.

The same logic would theoretically apply in the tanker and dry bulk sectors, even though there are no set schedules.

Slower speeds would equate to fewer available ships to move spot dry and wet bulk cargoes. Spot rates would rise and asset pricing would follow suit, incentivizing newbuilding orders. Additional carbon dioxide emissions would be generated through the construction of new ships as well as when new vessels went into service.

As this debate intensifies, the core question is likely to be whether a global speed limit can actually cap GHG-emitting vessel capacity when you cannot cap charter rates or shipyard output.

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Greg Miller, Senior Editor

Greg Miller covers maritime and finance for FreightWaves. He took a circuitous route to get here: After graduating Cornell University, he fled the harsh winters of upstate New York for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he escaped the tropics for the safety of New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at Fairplay shipping magazine as a senior editor in various roles, including managing editor, winning multiple awards for his coverage of the global maritime industry and its burgeoning presence on Wall Street. He currently resides in New York City with his wife and two Shi Tzus.

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