Coming Soon to an Ocean Near You: Ships Moving a Tiny Bit Slower

Date: Friday, July 13, 2018
Source: Bloomberg

If you happen to be at the beach this summer, make a mental note of any giant freighters crossing the horizon. In a few years’ time those same ships will probably be moving just a fraction slower.

If the slowdown does happen -- and the likes of Citigroup Inc. say it will -- then the wider consequences would be profound for both the shipping industry and its customers, given that about 90 percent of world trade moves by sea. The cause of this deceleration? A rule to combat the merchant fleet’s emissions of sulfur oxides starting in January 2020.

While such a slowdown might shave billions of dollars off shipowners’ single largest expense -- fuel -- it would also effectively limit the number of available vessels, risking an upward spiral in freight costs.

“It’s going to impact all of shipping: containers, tankers and in particular dry-bulk,” said John Kartsonas, New York-based managing partner at Breakwave Advisors LLC, which runs an exchange-traded fund for dry-bulk shipping. “You will have shipowners instructing their captains to slow down, and if everybody does, global supply will come down significantly.”

Over the past year, derivatives to bet on, or hedge, shipping rates in 2020 surged by 44 percent for giant Capesize ships that haul hundreds of thousands of tons of iron ore and coal, according to data from the Baltic Exchange Ltd. in London. The 2020 contracts, called forward freight agreements, were near $19,000 a day on Thursday, close to the highest since that specific contract began trading. Across every class of commodity shipping, FFAs for 2020 are trading much higher than they were a year ago.

The fleet slowdown is being anticipated because of rules mandated by the International Maritime Organization in October 2016 that vessels cap sulfur levels in their fuel from 2020. Doing so should help to fight human health issues such as asthma, as well as acid rain. As the deadline approaches, the decision is starting to ripple through the global trading system, creating winners and losers in both the refining and shipping industries.

The rule is expected to make IMO-compliant fuel more expensive, which shipping companies are trying to offset.

Reducing speeds, or slow-steaming, “will be part of the arsenal of options that we as shipowners will have available to us,” said Brian Gallagher, head of investor relations at Euronav NV. “It will be very dependent on what the costs are and what the environment is when we get to 2020.”

For more, listen to this mini podcast on how these rules may disrupt global trade

Svein Moxnes Harfjeld, the joint chief executive officer of DHT Holdings Inc., said speed cuts “will be positive for the market” in the event that rates are weak, because fleet capacity would effectively drop.

Analysts from Goldman Sachs Group Inc. to Wood Mackenzie have predicted that the rule change will create an additional $40 billion to $60 billion in costs for shipping companies, which the industry will pass along to its customers. That could affect trade in everything from commodities like oil, soybeans and steel to items that move on container ships, like TVs, furniture and clothes.

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