Market pressure and regulatory developments force the industry to focus on energy efficiency. In times of low bunker costs, limited environmental regulation and high capacity the industry paid little attention to energy consumption of their vessels. Times, however, have changed. Shipping companies have started to recognise the potential savings available both in new building and operations. Irrespective of the cyclic nature of shipping energy efficiency  will become and remain the key differentiator for future competition.
Rising bunkers costs increase challenge for profitability
Today most segments in shipping are facing decreasing revenues and increasing costs. On the one hand they have to deal with low freight and charter rates – rates that are not expected to recover to sufficient levels in the near future due to high oversupply in the market. While at the same time bunker prices have more than doubled within the last three years – reaching a level today of about 700 USD per ton. This makes bunker the largest cost position in shipping today, making up a 30-60% share of total costs – depending on the vessel segment and operational speed. With bunker prices likely to exceed 1,000 USD per ton over the lifetime of today’s new build vessels, taking into account rising crude oil prices and tariffs for sulphur and CO2 emissions, this cost pressure will increase even more.
Tightening regulation puts pressure on shipping companies
However, bunker prices are not the only factor forcing the industry to reduce consumption. Regulations are coming into place that will make it necessary to build efficient vessels and operate them in a fuel efficient way. From 2013 onwards the IMO made the Ship Energy Efficiency Management Plans (SEEMP) mandatory for all vessels, both existing and new builds. The SEEMP is a documentation of all the measures that have been defined for use on board a vessel in order to reduce bunker consumption and thus, CO2 emissions. Continuous improvement is required, measured by Key Performance Indicators (KPI) and tracked against defined goals. Organisations like Oil Companies International Marine Forum (OCIMF) have already provided their own specific recommendations and best practices for energy savings. Customers like the oil majors have already made SEEMPs mandatory for charter contracts today.
For new builds the Energy Efficiency Design Index (EEDI) comes into play. From 2013 all newly built vessels will have to better an EEDI reference score, based on the vessel’s type and size, that is taken from the average of the current world fleet. As time goes on this required EEDI score will be significantly tightened. Current plans would see it lowered in three steps, with the limit in 2025 being 30% lower. Initially from 2013 the EEDI will apply to container vessels, tankers, bulkers and several other segments, with the application for other ship types also planned.
Beyond the EEDI and SEEMP IMO and regional authorities (e.g. European Union) are also currently discussing the introduction of market-based measures for emissions reduction, e.g. emissions trading systems, emissions taxation or greenhouse gas funds coupled with a bunker surcharge. Furthermore the flag state Singapore has already begun offering a reduction in its tonnage tax for vessels which meet the EEDI requirements and several ports affiliated with the World Ports Climate Initiative (WPCI) are also considering environmental performance in their port fees. More regulation of this nature on a global, regional and local level appears likely. Economic aging of vessels will accelerate.
Costs, compliance, competitiveness – shipping companies need to act now
Pressure from markets and regulators are stimulating efforts to optimise the energy efficiency of vessel new builds. Thus, existing vessels, oftentimes optimized for high design speed, will need to compete against vessels with significantly better fuel efficiency at the new operating profiles. This design difference means that many older vessels will struggle to compete.
In times of vessel oversupply charter rates start reflecting energy efficiency in design and operations. Fuel consumption becomes relevant for all players in the maritime value chain: operators as they typically pay the bunker, but also owners and ship managers. They all need to contribute to emission and bunker cost savings. For existing vessels, where the degree of freedom for technical improvements is limited, efficient operation becomes crucial to remain competitive. Both design and operational measures, however, should be embedded in an energy efficiency strategy and this strategy used for effective positioning in the market. Only then can the competitive advantages of efficiency gains be achieved.
Source: GL Group