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November 25 2019

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4 The Journal of Commerce | November 25 2019 www.joc.com Mark Szakonyi THE DOUBLING DOWN of container lines on scrubber installations as the spread widens between low and high-sulfur fuel prices will allow some carriers to mitigate the operating costs tied to the IMO 2020 mandate more than rivals can, potentially spurring the former to grab market share. But the industry's pivot to scrubbers is a gambit in that it hinges not just on high-sulfur bunker fuel prices staying significantly lower than that of low-sulfur fuels, but also the likelihood that regulators won't further restrict scrubbers as environ - mentalists raise alarms. The rising role and risk of scrub- bers — now set to be installed on 10 percent of the container ship fleet by 2020, double what was estimated at the start of the year — illustrates the challenge container lines have in mitigating their largest operating cost: fuel. Under pressure from even steeper environmental mandates and amid signs of "peak oil" — de- fined not by the end of economically feasible supply but by a permanent reduction of demand as alternative energy output increases — carriers' handling of energy costs will increas- ingly determine their fortunes and the competitive landscape. "If the price premium of [very low-sulfur fuel oil] is $100 to $150, this could translate into an overall 10 to 15 percent operating cost advan- tage for shipping lines with a larger share of scrubber installations," Steve Saxon, a partner at McKinsey & Co. focusing on shipping and ports, told The Journal of Commerce. "These shipping lines may use their cost advantage to take market share, and, due to the competitive response, this risks the industry as a whole not being able to pass through the higher fuel costs as they hope." Carriers were cautious in ordering scrubbers until the last six months, when they became more confident that the investment of $2 million to $3 million to install them on newbuild vessels held a cost advan - tage. Since then, the business case for scrubbers has only improved, with the price spread between high- and low-sulfur fuels widening to roughly $250 per metric ton from about $200/mt a month ago, according to an analysis of price data from Oil Price Transportation Service, a sister company of The Journal of Commerce within IHS Markit. As of Nov. 12, low-sulfur fuels at the port of Rotterdam were selling at $500/mt, compared to just shy of $253/mt for high-sulfur fuels. The changing economics of scrub - bers spurred a policy change from Maersk, which last year said it would only install the exhaust- cleaning sys- tems on a few ships. Now, the world's largest ocean carrier also has the third most scrubbers on order of any line, with 140 confirmed vessel installa- tions on both owned and chartered ships, according to maritime analyst Alphaliner. Mediterranean Shipping Co. (MSC) leads the global fleet with confirmed orders for scrubbers on 250 ships, followed by Evergreen Line with 140 ships. Ocean Network Express (ONE) remains the only top- 10 carrier without scrubber orders confirmed. In its half-year results report, released in October, ONE said it was still studying the feasibility of installing scrubbers on some of its larger container ships and would rely on compliant low-sulfur fuel to meet the requirements of the IMO 2020 regulations in the short term. Having already made their deci- sion, MSC and Maersk will have more than 35 scrubber-fitted ships of over 18,000 TEU by January 2020, and all 62 of their 18,000- to 23,600-TEU mega-ships are expected to be fitted with scrubbers by 2021, Alphaliner said. That will allow the 2M Alliance members to sail at higher speed than rivals, or keep their fuel bills lower by sailing at normal speeds. In the last nine months, the share of container fleet expected to be outfitted with scrubbers before the Jan. 1 start of the International Maritime Organization's mandate has increased from between 3 and 5 percent to 10 percent, according to IHS Markit and McKinsey estimates. Fuel prices are still fluid, however, and the IMO-spurred downshift in production of high-sulfur fuel oil (HSFO) from 3.5 million barrels daily to 1 million barrels will cause a "resur - gence in the HSFO market and prices," according to Damian Kennaby, IHS Markit's executive director of oil, mid- stream, downstream, and chemical. Carriers also risk a scrubber regulatory backlash. According to Reuters, Singapore and China, as well as individual ports in Finland, Lithua- nia, Ireland, and Russia, have banned open-loop scrubbers, which release the water used to clean exhaust gas during sailing. Closed-loop scrubbers, which are more expensive and less popular than their open-loop counterparts, retain the majority of the water used in the cleaning process to be disposed of at ports. The British Port Association last month voiced concerns about the long-term contamination risk of such sediment disposal, according to a report in The Independent. The push- back will likely only increase even as carriers work to brandish their green credentials by investing toward long- term decarbonization goals. JOC email: mark.szakonyi@ihsmarkti.com twitter: @MarkSzakonyi There's the (scrubber) rub The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, November 25, 2019, Volume 20, Issue No. 24. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Letter From the Editor "Lines may use their cost advantage to take market share, and this risks the industry not being able to pass through the higher fuel costs."

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