IFCHOR Research Regulations 2017-2020: Compliance Challenges and Impact on Dry Bulk Overcapacity Marine Money - Geneva Forum, June 2017 1
Regulations 2017-2020 Roadmap.... Compliance Challenges Low Sulphur 2020... Impact on the fleet Ballast Water Treatment Impact on the fleet 3 4 9 10 11 Conclusion. 12 2
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) 2016 2017 2018 2019 2020 2021 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
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
LSF 2020 Compliance Challenges FUEL AVAILABILITY FUEL COST SCRUBBER INVESTMENT 5
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 2016 1.7 2020 0.9 FUEL COST LSFO HSFO Unit: millions barrel / day 3.5 0.25 1.1 3.8 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: 2017 2020 Global refining capacity 97 mbd 103.4 mbd Global refining demand 85 mbd 90.3 mbd Source: IMO, IEA Medium-Term Oil Market Report 6
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 2019 2020 2022 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
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 $14 000 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
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
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
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? 2022 2024 11
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 12 10 8 6 4 Fleet over 15 yrs old with s.s. due tot 63 Mio Dwt Handysize Supramax Panamax Capesize 6.4 5.8 3.6 5.2 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 0 15-20 >20 15-20 >20 15-20 >20 15-20 >20 15-20 >20 15-20 >20 2017 2018 2019 2020 2021 2022 Source: Seaweb IHS 12
2017-2020 End Of Overcapacity? WBT and LSF regulations are expected to intensify overcapacity reduction only in 2020 BDI 4500 4000 3500 3000 2500 2000 1500 1000 500 0 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-20 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 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
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