How will it impact the industry?

Increasing the cost of shipping in Europe by €7.9bn, should impact industry and competitive dynamics in (maritime) transport. What is to be expected?

Modal shifts: Considering the significant efficiency benefits of shipping vs other means of transport, it is unlikely that cargo will be shifted in relevant volumes away from maritime to land- (or airbased) transport. This might change once smaller vessels are included that typically provide near-shore services – but even then ETS is likely to have no meaningful impact on the modal split.

Changing voyage patterns: the solution for the consideration of transshipment ports for container vessels has eliminated the most obvious evasion option. We have tested a few other evasion tactics by altering voyage plans and port sequences but don’t believe that there is much to be gained considering the overall cost of bunker and port calls. Finding transshipment ports outside of those to be designated by the EU can provide benefits (especially for container operators or those in the parcelling business) assuming that respective cargo is available. But as this will not go unnoticed for long, market forces will quickly eliminate any potential benefit through a likely adjustment of prices for those cargos. Other evasion patterns can be expected from the cruise industry, adjusting voyage plans to incorporate more non European ports especially on longer legs, but the overall effect will not be significant.

Capacity: Higher cost of bunker will – ceteris paribus – lead to slower speeds. The cost of EUAs will increase the cost of bunker between USD150 and USD300 per ton of bunker, reminiscent of the price increases seen in 2007/08 and 2010/11. Supported by significant newbuilding orderbooks that we are seeing in most segments and the pressure from CII regulation, speeds are likely going to come down. This will effectively reduce the markets capacity and thus help stabilize prices.

Competition within segments: Give the significant increase on effective bunker prices, the premium for efficient vessels will increase in the charter markets as will the ability to generate above average returns for operators. The increasing benefit of efficiency should have a positive effect on newbuilding activity – with more efficient vessels replacing less efficient ones at a faster rate.

Vessel Values: This effect should hit vessel values as well and lead to stronger differentiation.

Retrofits: Many of the low hanging fruits in retrofitting vessels have been harvested after the 2011 bunker price increases and vessel designs since then have improved significantly from an efficiency perspective. Nevertheless, we are seeing substantial additional activity ahead of the ETS implementation and full orderbooks by those selling retrofit solutions. Especially in segments with high cost burdens from ETS (cruise, ro-pax, container), retrofits will help drive emissions down.

Operational efficiencies: Besides potentially slower speeds, we don’t see significant further improvements, as focus has been on operational efficiencies for quite some time now and the cost of EUAs doesn’t fundamentally change the economics here.

Alternative Fuels: One of the hopes of EU ETS is that it will help drive the transition to more sustainable fuels. One pathway would be to gradually transit to bunkering methanol and then, as green methanol becomes more readily and economically available (or other regulation like FuelEU Maritime force the transition) – move to green methanol. Given the carbon factor of methanol of 1.913 (vs. 3.14 for HFO) and the fact that the energy yield from methanol is only half of that of MGO or HFO, ETS actually increases the disadvantage of bunkering methanol. While technically correct from an emissions perspective, this effect should be addressed consciously.

And when it comes to green methanol – assuming it is excluded from the ETS regime – the price per EUA needs to climb to €500 to make it a viable energy source at today’s prices. Let’s hope (and assume) that these prices will come down.

Cold Ironing will become less unattractive but far from attractive: Even after considering the cost of EUAs, shorepower will remain around 4x more expensive than running aux-engines on MGO. With shore power implementation mandated for container and cruise vessels, these segments will comply – but others, using other terminals and ports , will not be enticed by EU’s ETS to follow suite.