Scrubbers revisited.

Back in October 2018, I published on this blog a somewhat negative article on scrubbers as a means of compliance for IMO2020 regulations.  Today we are close to finishing the first month of IMO2020 in full implementation.  I think it opportune to revisit this subject in view of the experience to date with these regulations now in force.

I always saw scrubber refitting as speculative by nature depending on fuel differentials.  I never liked the concept of making a ship a factory to remove sulphur from heavy residual fuel oil.  I considered direct use of compliance low sulphur fuel oil from the refineries as a more efficient solution.  Also I believe in a level playing ground for the shipping industry and scrubbers create a tiered market for the vessel segments where they are widely used.

In fact, the initial fuel differentials have been much wider than initially forecast.  The actual fuel price spreads are well above projected levels to support the scrubber investment.  This has made the prime movers like Scorpio, Star Bulk and others the winners and substantial beneficiaries on the initial scrubber wager. Indicatively, Okeanis VLCC's are earning a staggering US$ 121 m per day as scrubber savings kick in.  The Greek shipowner says it has already made back 44% of the retrofit bill for its big tankers.

Further scrubber refitting is proving to be an excellent asset play.  Close to 20 modern or resale VLCCs are being touted for sale at high prices in a market that is offering shipowners strong returns.

Looking ahead, we do know yet whether fuel spreads may narrow.  The high differentials may be simply a product of the supply disruption in initial market conditions. Over time, the prices may normalize to lower levels.  Fuel spreads may drop significantly.

One issue to be resolved is the matter of the continued supply and availability of traditional heavy residual fuel oil.  Refineries have ramped up production of low sulphur fuel oil and are earmarking HSFO for other uses than marine fuel.  A smaller supply of HSFO and tighter availability may result in higher prices and also storage issues for the smaller quantities in the market for marine fuel.  Already it is reported that there are availability issues for supply of HSFO in the Far East and ships forced to Singapore to bunker heavy residual fuel oil.

In any case, the scrubber school is presently at the top of the shipping world as the winners in this debate. Some are thinking about monetizing their position by selling the scrubber-fitted units at a premium, but this depends on willing buyers and nobody knows how long present fuel spreads will remain of whether fuel spreads may narrow.

Furthermore, dry bulk rates are very weak and tanker rates are falling, so regardless of whether the vessels are fitted with scrubbers or not, the earnings margins are not improving.

Postscript: Fuel spreads have now collapsed with the dramatic fall in oil prices.  Plans for scrubber installations are now facing massive cancellations, particularly in the dry cargo and containership sectors. We will see in coming quarters whether the wagers made by companies like Star Bulk and Scorpio Tankers pan out in earnings results for their shareholders.

CMA-CGT merger with Ceva and its challenges

The Ceva merger is a milestone for CMA-CGT.  It represents an effort to move away from a transport provider business model to a logistics operation, in hopes of creating more value content to services sold and better earnings margins for shareholders

The liner industry has been through years of stress.  This is related to many years ofovercapacity and intense competition sending box rates to very low levels, despite China entering the WTO and a global trade boom with a massive rise in volume of container traffic on head haul routes to Europe and the US for finished goods.

The liner industry has basically exhausted any possible way of improving profit margins within its present business model as transport provider to freight forwarders.

• Initially there was an attempt to move to large tonnage to defend earnings margins by lower unit costs.  The industry moved to Panamax size to post-Panamax for the huge 10.000 teu plus vessels that are employed on head haul routes today.  Whilst this process created a cascading of the small older tonnage to other routes. Every liner company was obliged to follow suit to remain competitive in the alliance system. Financially weaker operators resorted to chartering larger units from vessel provide companies, who could carry them on their balance sheet against the period charters. None of this provided any sustained relief with improved box rates and better earnings margins.  The larger units and cascading generated more overcapacity in the process.
• The Global Financial crisis in 2008 created substantial trade disruption that put all the major liner companies in massive losses.  |Defensively the major liner companies resorted to slow steaming for lower fuel costs and soak up as much tonnage overcapacity as possible.  This mitigated the operating losses and provided some reprieve. Eventually slower speeds became a norm in the liner industry.
• It did not prove to be any game changer, however.  Eventually two major Korean lines - Hyundai and Hanjin - had serious financial problems leading to debt restructuring and the bankruptcy of Hanjin.  The Hanjin bankruptcy helped rebalance the industry. There was a revision of the alliance system to three major alliances.  For a brief period there was some improvement in box rates with this industry consolidation.
• IMO2020 and higher fuel costs is a tremendous challenge to the liner industry.  The liner industry has been the most proactive shipping segment to deal with these challenges.  All the options are painful.  Using compliant low sulphur fuel requires securing in advance necessary fuel supply to support continuation of liner service without disruption.  Fitting scrubbers on larger container vessels is an expensive CAPEX investment and means the immobilization of the significant number of vessels for refitting. Use of LNG requires new building orders for another generation of container vessels.

Last year there was a partial recovery for some of the liner companies, but others remained with operating losses.

After the 2008 GFC, CMA-GGT nearly went into bankruptcy.  They were compelled to take on a Turkish partner for fresh capital.  Only recently last year did CMA-CGT start to generate again operating profits.  This despite a merger with APL and moving operations to Singapore.;

The CEVA acquisition is an major attempt to revise their business model.  But CMA-CGT remains with a weak balance sheet and the merger execution is a major financial challenge for them.  They are looking to divest of their terminal business to raise cash to complete this merger.  CMA-CGT has also ordered a new generation of LNG powered containerships.

CMA CGM is saddled with US$ 20 bio debt and serious liquidity issues.  They must get a grip on  their debt and improve  liquidity in 2020 or CMA CTGT may have to restructure its balance sheet, 

Meanwhile the liner industry faces further challenges.  The Chinese economy is maturing and China is moving to slower GDP growth.  Trade patterns are changing.  Trade is becoming more regional.  Production is moving closer to consumption areas.

The general containership outlook remains bleak.  Box rates are likely to remain low. Older vessels may be subject to extraordinary value depreciation.  We have seen this before with container vessels even younger than 20 years going to scrap.

The only bright side is improved supply-demand balance in interregional trade and better time charter rates for old Panamax vessels and smaller containerships.