Ship orders slump to 20-year low with owners unsure which green fuel to use

Singapore

SHIP owners facing looming deadlines to use less-polluting fuels have slashed the number of new vessels on order because they don't know which alternative technology to switch to.

Ammonia, hydrogen, biofuels and electrification are some of the many contenders to power the world's future merchant fleet, but most are only in the trial stage and won't be scalable for at least a decade. With the life of a commercial ship averaging around 20 years, opting for a technology that doesn't take off could be very costly.

But owners are running out of time to make the choice. In 2018, the International Maritime Organization (IMO) set a target to cut shipping's greenhouse-gas emissions in half by 2050 from 2008 levels. The deadline prompted some ship owners to hold off on new orders until it became clearer which new fuels would be the best option - a decline that has turned into a slump with the subsequent global trade disputes and the pandemic.

Orders fell almost 10 per cent in 2019 and then more than 50 per cent in 2020 to the lowest in at least two decades, IHS Markit data show. If activity doesn't pick up, that could lead to a dearth of vessels and a spike in freight rates in a few years.

"People aren't ordering ships because we don't know what to fuel them with," said Morten Aarup, head of market research at Danish vessel owner D/S Norden A/S. "Engineers, ship designers need to come together" urgently to find the best solution, he said in a recent panel discussion on shipping trends.

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Ship owners who fail to switch to new, cleaner vessels could find themselves at a competitive disadvantage as more customers demand environmentally friendly transport. About 12.3 per cent of vessels on order have alternative-fuel propulsion, compared with just 0.6 per cent of the current global fleet, according to data from Drewry Maritime Services.

But the use of alternative fuels in shipping is still in its infancy, with many of the big ship owners pursuing different alternatives. Trafigura Group, one of the world's biggest energy traders, has a stake in a company selling marine biofuels, vessel classification society Lloyd's Register has given approval in principle to several ammonia-fuelled ship projects and Swedish tanker line Stena Bulk AB is planning to run some of its vessels on used cooking oil.

The IMO's targets in 2018 called for a 40 per cent reduction in the carbon intensity of international shipping by 2030 and a 70 per cent drop by 2050 from 2008 levels. Carbon intensity compares the amount of emissions to a unit of economic output. Those goals may become even more ambitious when the United Nations agency reviews them in 2023.

The IMO also introduced rules at the start of 2020 that banned marine fuel containing more than 0.5 per cent sulfur for ships not fitted with pollution-reducing scrubbers.

The targets have contributed to the drop in new vessel orders, said Jayendu Krishna, a director at Drewry. While several alternative fuel projects have begun, it's unclear which ones will be scalable, he said.

LNG (liquefied natural gas) is a lead contender for a transition fuel on the way to full decarbonisation, just as it is in electricity generation. Royal Dutch Shell Plc is set to charter 40 dual-fuel barges for use on the Rhine river that can run on it. While the gas is still a fossil fuel, its CO2 emissions are lower than conventional marine fuel and it's readily available. LNG-fuelled ships already make up 8 per cent of new vessel orders, said Krispen Atkinson, a principal consultant at IHS Markit.

Using LNG would cut greenhouse gas emissions for shipping companies by almost 20 per cent compared with fuel oil, said Christos Chryssakis, business development manager at DNV GL, a maritime advisory and verification provider.

AP Moller-Maersk, the world's biggest container line, takes a different view. "There is no time for so-called transitional fuels," said chief technical officer Palle Laursen.

The Danish company is instead aiming for net-zero-emission fuel solutions only and sees fuels based on ammonia, alcohols and alcohol-lignin blends as the most promising, he said. Maersk has kept its fleet capacity flat since 2018 and hasn't invested in large new vessels recently, Mr Laursen said.

Ammonia and hydrogen are probably the clean-fuel favourites at the moment, according to Mr Atkinson. Electrification of ships is another possibility, although due to power-to-weight ratios it will probably only be practical for vessels operating on shorter routes, he said.

"When owners are considering newbuildings, they're very confused," Mr Chryssakis said. Future fuels won't be available at scale until at least 2030 and, while all solutions need to be explored, the industry can't afford to wait, he said. BLOOMBERG