Regulations : Compliance Challenges and Impact on Dry Bulk Overcapacity

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1 IFCHOR Research Regulations : Compliance Challenges and Impact on Dry Bulk Overcapacity Marine Money - Geneva Forum, June

2 Regulations Roadmap.... Compliance Challenges Low Sulphur Impact on the fleet Ballast Water Treatment Impact on the fleet Conclusion. 12 2

3 Upcoming Regulations - Roadmap Regulations in the 4 years have the potential to re-shape the Dry Bulk market U.S. BWM EIF (Entry in force) Entry in force (EIF) in the U.S. (JAN 2016) IMO BWM - Ratification Flag states reach the 35% ratification threshold (SEP 2016) IMO BWM EIF Entry in force (EIF) globally (SEP 2017) U.S. BWM - Deadline Within next dry dock (2022) IMO BWM - Deadline Within IOPP renewal (2022) TODAY IMO SOx EIF Global sulphur emissions capped at 0.5% (JAN 2020) IMO SOx - Ratification The IMO sets the deadline for Jan 2020 (OCT 2016) 3

4 LSF 2020 Compliance Challenges LSF Compliance: a trade-off between high investment and high fuel costs COMPLIANCE METHODS - Comparison 2020 MGO / LSF SCRUBBER LNG TECHNICAL FACTORS ENGINE MODIFICATIONS STRUCTURAL CHANGES COMPLEX RETROFIT SAFETY ECONOMIC FACTORS FUEL COST AVAILABILITY HIGH INVESTMENT UPFRONT NOT FUTURE-PROOF HIGH INVESTMENT FUEL AVAILABILITY 4

5 LSF 2020 Compliance Challenges FUEL AVAILABILITY FUEL COST SCRUBBER INVESTMENT 5

6 LSF 2020 Compliance Challenges Official sources indicate that compliant fuels will be sufficiently available by 2020 IMO projections: MGO demand to increase by 125% to 3.8 Mio barrels/day by 2020 FUEL AVAILABILITY mid distillates FUEL COST LSFO HSFO Unit: millions barrel / day IEA: Refining capacity to expand across geographies by 2020 and surplus to increase by 1.1 Mio barrels/day by 2020 SCRUBBER INVESTMENT IEA refining activity outlook: Global refining capacity 97 mbd mbd Global refining demand 85 mbd 90.3 mbd Source: IMO, IEA Medium-Term Oil Market Report 6

7 LSF 2020 Compliance Challenges Future prices point at a $260 / ton spread between Gasoil and IFO 380 in 2020 IMO s decision triggered a plunge in forward HFO prices and a modest increase in forward gas oil prices FUEL AVAILABILITY MGO = 7% of total gasoil demand TODAY IFO 380= 75% of total fuel oil demand FUEL COST $475 $183 x ton $262 x ton spread Gasoil % +[VALUE] Gasoil production and fuel oil supply are positively correlated SCRUBBER INVESTMENT 0% $300 +[VALUE]; $502 x ton -18%; $240 x ton IFO 380 % -12% Source: IFO 380 Rotterdam - NYMEX; ICE Gasoil 7

8 LSF 2020 Compliance Challenges Scrubbers offer positive returns on investment at current IFO-MGO spread Installing a scrubber can boost the chances to break even Freight + premium Supra 2 yrs old. Opex: $5000, debt: $4500/day FUEL AVAILABILITY $ Freight scrubber Fuel spread $260 Scrubber cost: USD 2.8 mln, closed loop, 5 yrs loan, +2% fuel consumption $9 000 loan scrubber Premium: generated by the spread between HFO and LSFO/MGO FUEL COST opex opex Fuel prices and freight rates based on current futures Supra 58k debt-free Supra 58k For a one-off investment the payback period is relatively contained SCRUBBER INVESTMENT Fuel spread $190 Historical mean 3 years Fuel spread $260 Current futures <2 years Fuel spread $350 High Scenario 1 year Source: Baltic Exchange, interviewed clients 8

9 LSF 2020 Compliance Challenges High costs and technical risks may limit the adoption of scrubbers ECONOMIC DRAWBACKS OPERATIONAL DRAWBACKS FUEL AVAILABILITY BROAD COST RANGE NARROWING COMPETITIVE ADVANTAGE + DOCKING AVAILABILITY SCRUBBERS AVAILABILITY UNCERTAIN FUTURE COMPLIANCE CHEMICALS / SLUDGE DISPOSAL HIGHER POWER CONSUMPTION (+2%) IMMATURE TECHNOLOGY FUEL COST SCRUBBER INVESTMENT 9

10 LSF 2020 Impact On The Fleet 2019: 17% of the Dry Bulk tonnage older than 15 yrs and non-eco / fuel inefficient Handy and Panamax retain the highest share of uncompetitive tonnage and a higher scrapping potential + 15 yrs age 14% eco 0 yrs 20% 17% 22% 2019 projections CAPESIZE PANAMAX SUPRAMAX HANDYSIZE Source: Seaweb IHS 10

11 WBT Compliance Challenges WBT: The misalignment between U.S. and IMO regulations could increase Implementation at next scheduled dry dock USCG 4 models approved so far (UV and electrolysis types) Different REGULATIONS Alternative Management System AMS installed Extensions granted: proof of intent Implementation at next IOPP certificate IMO 69 types approved Further extensions? OPERATIONAL DRAWBACKS DRY DOCK SPACE AVAILABILITY COMPLEX RETROFIT EXTENDED LOADING TIME Next MEPC in July may push for further extensions, but what about USCG enforcement?

12 WBT Impact On The Fleet The WBT regulation will have a limited impact on the fleet in the near term Only 100 bulkers over 20 yrs old (9.5 Mio Dwt) are expected to undergo special survey in the next 2 years Mio DWT Fleet over 15 yrs old with s.s. due tot 63 Mio Dwt Handysize Supramax Panamax Capesize Installation costs at about $1 Mio for a retrofit on a median bulker Currently 40 ships carry water ballast treatment systems Companies may withhold ships from trading with the U.S. and not comply with USCG WBT regulation 2 1 Age group Survey due > > > > > > Source: Seaweb IHS 12

13 End Of Overcapacity? WBT and LSF regulations are expected to intensify overcapacity reduction only in 2020 BDI Low demand scenario 2020 High demand scenario BDI Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep Overcapacity - Mio Dwt Assumptions: _ projections do not include ordering activity _ average fleet speed is constant at 11.5 knots s.s. _ scrapping acitvity to intensify at the end of 2019 and a negative fleet growth in 2019 Source: Seaweb HIS, IFCHOR Research 13

14 THANK YOU! Contact: Lausanne Athens Singapore Hong Kong Genoa New York Melbourne Capes Panamax Handy/Supra Tankers Services: Projects/S&P Research Ship Finance Operations Copenhagen LEGAL DISCLAIMER: The information contained in this report has been obtained from diverse sources. IFCHOR S.A. considers such information to be reliable but IFCHOR S.A. does not guarantee its accuracy or completeness. Whilst every care has been taken in the production of the report no liability can be accepted for any loss or damage incurred in any way whatsoever. This report has been produced for the internal use of the intended recipients only and no reproduction is allowed prior the authorization of IFCHOR S.A. 14