INSIGHT: How Will Ship Speed Limits Impact Global Bunker Demand

Tuesday May 14, 2019

Over the last week there has been a big push to slow ships down to reduce their bunker consumption and associated emissions. Despite some relatively large numbers being cited as to the potential impact of such a move, for the bunker industry it will mean a short-term drop in bunker sales but little more. Volumes going forward will still grow, only at a lower than previously forecast rate. Speed limits would, however, introduce some new logistical complexities for the bunker supply chain.

Here's why.

Why is This Happening?

A key task of IMO's latest gathering of delegates in London is to consider quick ways the industry can reduce GHG emissions and keep it on track to meet its more ambitious IMO2030 and IMO2050 targets.

The harsh reality is that there is currently no practical way to switch the vast majority of the global fleet away from burning GHG producing, carbon-based liquid fuels. For now, the only available route for a quick win on reducing industry GHGs is to simply burn less fuel.

There are various ways we could achieve this, but over the last week the big push has been for IMO to implement a speed limit for ships to slow them down more than is happening naturally.

In theory, this would result in a lot of wins. Key among them is that less fuel consumption means less cost for operators, and less emissions keeps the IMO honest on its pledge to reduce GHGs.

However, as we have previously witnessed, what slower ships and lower fuel consumption might not be good for is the bunker industry.

"Today, ships are already traveling a lot slower than they were in the previous decade and we've clearly seen the effect on the bunker market of both slower steaming and more efficient engines," 20|20 Marine Energy's Adrian Tolson tells Ship & Bunker.

For those that missed it, that process of slowing down started over a decade ago and the impact on the bunker industry came to the fore in 2016 when we witnessed widespread layoffs and restructuring by players big and small.

"The truth is a lot of people have been hired to deal with a volume that's no longer there," the CEO of a well-known bunker company told Ship & Bunker at the time.

Why Speed?

Targeting vessel speed is attractive for two reasons. Firstly, it is one of the only measures that can be applied right now to every vessel. Second, is that a small reduction in speed results in a proportionally larger reduction in bunker consumption and associated emissions.

Work undertaken by Martin Stopford in 2009, and presented again last week as part of a study by ├ľko-Institut e.v. in Germany supporting the economic benefits of slow steaming for bulk carriers, shows that if a Panamax travelling at 16 kn reduced its speed by 31% to 11 kn its fuel consumption would fall 67% from 44 to 14 tons per day.

But the same logic means that the slower your initial speed, the less pronounced the savings are from then slowing down. For example, Stopford's numbers show that slowing from 16 kn to 15 kn drops fuel use by 8 tons per day, while slowing from 12 to 11 kn reduces fuel use by 5 tones per day.

When we look at how this translates to the global fleet there are three interrelated factors to consider: ship speed, number of vessels, and demand. If any one of those changes it forces one or both of the other factors to change too.

"Operators are always looking to get maximum miles for minimum fuel, so in theory, ships today have slowed down to the most economical level to match the current fleet size and demand level," says Tolson.

"If we were to artificially reduce ship speed by implementing a speed limit without there being any change in demand, the only response is to add more ships."

Adding new tonnage is not instantaneous of course, and in the short term there would be a drop in bunker consumption while the industry arranges the introduction of new vessels to meet demand.

As slow steaming is now already the norm for many vessels, that drop in bunker demand will be relatively small, particularity if compared to such a move made a decade ago.

"Causing supply to be lower than demand would of course also push up rates, which is perhaps why we see such heavy support for this idea coming from shipowners, and at IMO level from large ship-owning nations," Tolson observes.

As more ships are introduced, bunker consumption would stabilize and then continue to rise but at lower than the previous forecasts for "business as usual" (BAU) levels.

CO2 Emissions

The above dynamic is reflected in a recent study by CE Delft that was also presented to IMO last week. The study looked at the effect of various measures on shipping's global GHG emissions out to 2030, including speed limits taking in to account that slowing ships down means a larger fleet is needed to meet transport demand.

It finds that that CO2 emissions (and by extension bunker consumption) in 2020 will be 10% higher than the baseline level set in 2008.

Implementing a 20% speed reduction compared to average vessel speeds in 2012 would then cause levels in 2022 to be 10% lower than the baseline 2008 level, which is the same as they were in 2018. They would then start to rise and by 2024 return to 2020 levels, and by 2030 rise to 30% higher than they were in 2008.

Without speed limits or other measures, "business as usual" levels in 2030 are seen as being double of those in 2008.

"The bunker industry is already under pressure facing the challenges of IMO2020. A drop in volumes caused by speed limits will add further pressure and could even cause some players to once again scale down their operations," says Tolson.

"On the plus side, if the speed limit came in quickly enough it could soften the blow of IMO2020, both in terms of cost and product availability."

Demurrage

Talking to NSI's Paul Hardy on the matter, he points out that speed limits will have consequences for the bunker industry irrespective of how it impacts bunker consumption.

"In theory slow steaming should be good for everyone as there is not one owner or charterer who would quibble about reduced bunker consumption. But, there is an issue as mandatory speed restrictions coupled with IMO2020 may lead to increased demurrage claims," he says.

"If we take for example a vessel fitted with a scrubber bunkering in a port with limited dedicated land storage and barging options due to the reduction of HSFO demand. If said vessel is then faced with other scrubber fitted vessels due to bunker at the same time the ship could be waiting a considerable time to get supplied. This then has a knock on effect at the next port and potential severe financial penalties.

"The obvious thing to do would be to go full steam ahead to make up for lost time. If this is not an option due to speed limits, then the logistical supply chain comes to the forefront. It might not be supply at the best price but the promptest supply becomes the focus."

This problem may be eased if speed limits are set as averages, but perhaps such a speed limit system would need something in place equivalent to FONARs but for speed violations.