Moody’s sees ships, trucks, and rail having elevated credit risks

Shipping companies are looking to take up the challenge of meeting the new rules. Maersk  (Nasdaq OMX: MAER) is now marketing a low-carbon sailing to customers. 

Closer to home, major U.S. ports are requiring trucking companies to buy newer model trucks in order to service marine terminals.  

Despite concerns about vessels and trucks becoming stranded assets, Moody’s does see the hurdle to a greener future as manageable in many cases. 

The shipping industry faces one of the biggest near-term challenges with the International Maritime Organization’s rule that sulfur emissions must be capped 0.5 percent, down from the current 3.5 percent standard beginning on January 1, 2020. 

Shipping companies face higher costs throughout the IMO 2020 hump, whether due to buying more expensive low-sulfur fuel or spending on sulfur scrubbing devices to reduce output.

Moody’s notes that neither option is too palatable as low-sulfur fuel costs about $20 per barrel, or 48 cents per gallon, in the wholesale market. Sulfur scrubbers, meanwhile, cost between $2 million and $10 million and require a ship to be out of service for multiple days.    

But Moody’s noted that shipping has already been able to meet even tougher sulfur emission standards of 0.5 percent or lower in heavily trafficked coastal areas of North America, Europe and now China. Shippers in those major markets are already paying the higher fuel bills. As a result, Moody’s expects that “the higher costs resulting from the regulations will ultimately be passed on to customers, thereby lessening the effect on shipping companies.”

For the rail industry, the biggest threat is not the fuel use, but in cargo. Rail’s coal volumes continue to decline as low natural gas prices encourage power plants to switch and states seek to limit carbon dioxide emissions. But Moody’s notes that railroads have been able to tap other freight, particularly intermodal, to offset less coal. 

The risk in trucking is split between manufacturers and their carrier customers. But Moody’s said U.S. truck engine manufacturers have been dealing with stricter standards on diesel emissions for over 40 years, hence “future emission requirements will not require the significant step-up in costs that have accompanied past changes in regulations.” 

Carriers, though, face an increasingly complex calculus about the next truck they buy. The availability of battery-electric trucks will allow carriers to meet lower emission thresholds, but more efficient diesel engines will also be able to close that gap. As a result, Moody’s said the uptake of battery-electric trucks “will be relatively slow and will primarily depend on the all-in cost” of those vehicles relative to diesel trucks.