Monday, September 3, 2012

Container Shipping Rates Rise as Box and Bulk Freight Carriers Study LNG Bunkerage

Survey Predicts Future of Marine Fuels whilst Tariffs Increase
Shipping News Feature

WORLDWIDE – With container vessels and bulk freight carriers likely to be the big consumers of liquefied natural gas (LNG) as the new bunker fuel for maritime users in the coming decades, the findings of the latest study by Lloyds Register into the likely uptake of the technology by the global cargo shipping industry at first sight seem hardly surprising. Meanwhile the world’s largest box carrier has announced a freight rate increase between Asia and Europe.

Lloyds Register’s raison d’être means naturally that it has feet in both energy supply and ocean shipping camps, acting as it does to offer assurance to each sector and therefore in what is a unique and untested set of circumstances Lloyd’s felt it was necessary to construct a study model which allowed for flexibility according to the potential requirements of all possible stakeholders. The job was apportioned to Latifat Ajala, Lloyd’s Register’s Senior Market Analyst, who built a dynamic demand model for the study that was rigorously tested and validated with shipowners, ports and engine manufacturers and other vested interests. Ms Ajala commented:

”We use a model based on LNG supply, trade routes, ship-type fuel consumption, port locations and bunkering demand, as well as shipowner and port surveys. We then applied three demand and price-driven scenarios. What we found was that the likelihood of global LNG bunkering facilities being established will depend on high demand for LNG-fuel on deep-sea trades, which will be driven by the price of LNG relative to current and future alternatives.

”Excluding smaller ferries and local trades where there are local market, fiscal and regulatory driver, such as in parts of the Baltic and Norwegian shelf, it was the container-ship and cruise-ship markets that were the most likely to adopt LNG. This is because of their relatively high energy requirements, the demands of customers in these two sectors, their regular trading patterns and the time those ships spend in emission-control areas.”

The difficulty for those looking to make decisions is that forecasting energy prices has always been a dangerous business. For shipowners looking to make these decisions, flexibility may be the key. Choosing engines that can burn both gas and fuel oil, or that can be converted, may be one way to manage the regulatory and commercial issues involved with fuel choices.”

The study will be published in full in October in time for the Gastech Conference and Exhibition in London, but the preliminary conclusions are therefore, unsurprisingly, that other than the niche markets, the establishment of LNG bunkering infrastructure capable of supporting most of the maritime world’s consumers will be highly sensitive to the price of LNG relative to alternative fuels. The study’s base-case scenario predicted that by 2025 there could be 653 deep-sea, LNG-fuelled ships in service, consuming 24 million tonnes of LNG annually mostly containerships, cruise vessels or oil tankers, a 25% price cut if the gas market becomes more competitive predicts three times the number of vessels powered by LNG at that time, around 1,960, whilst a 25% price hike against current rates would mean little or no investment whatsoever in new build tonnage using the fuel. Hector Sewell, the Head of Marine Business Development for Lloyd’s Register, concluded:

”The obstacles to the adoption of LNG as a marine fuel are practical factors, but they are not technical. They are commercial. Establishing safe, reliable global LNG bunkering capability is feasible. But it will require considerable investment and risk management, and it will have to cover significant operational costs to challenge existing fuel-oil delivery systems.”

One company which can’t wait to speculate on a new generation of gas powered container ships is world leader Maersk which announced on Friday it expects to raise Asia – European box rates around 10 – 11% on the 1st November. In an aggressive move Maersk appears ready to back its time guaranteed delivery policy ‘Daily Maersk’ which was announced earlier this year and which helped the company back into profit in Q2 as, although by less than analysts had predicted, following previous rate hikes.

Maersk has long trumpeted the new generation of 18,000 TEU E class box vessels which it has been taking delivery of as the most economical and least polluting class of container vessels but this of course is entirely dependent on them running at something approaching full capacity. With ten of the largest container carriers ever built still coming on stream Maersk are relying on an increase in the trade of 5 or 6% to make the numbers add up, something which cannot be guaranteed.

The announcement last week follows the reduction in capacity Maersk made in February and was vague as to the precise amount of the anticipated rise leading many to speculate it was intended to test the water by gauging feedback from both customers and competitors before a final decision is taken. Much of the group’s box traffic is carried under contract rate and therefore is subject to individual negotiation at different times, a situation which has led to controversy previously for several ocean freight carriers, as with Maersk’s own dispute near $14 million dispute with Argos in 2010.