MSI: Bulkers without Scrubbers Will Become Uncompetitive

October 22, 2018

Early adopters of the exhaust gas cleaning technology are set to reap the fruits from higher charter rates and asset values once the 2020 sulphur cap enters into force, pushing up the low sulphur fuel prices.

Based on a five-year time horizon, Maritime Strategies International (MSI) believes there will be a technology-led two-tier market for dry bulk timecharter rates, similar to that seen in the LNG sector. However, the positive effect is expected to decrease as more ships install the technology.

“As long as significant fuel price differentials remain between HFO and LSFO – and MSI believes there will be in the long term – vessels with scrubbers installed will attract a charter premium,” says MSI analyst Will Fray.

“As more and more ships fit scrubbers, and over time as the finance is collectively repaid, vessels without scrubbers will face steep discounts and will become increasingly uncompetitive.”

The consultancy calculates that in 2020, the value of the time charter premium for a Capesize benchmark vessel fitted with a scrubber will be USD 12,100/day, for a Panamax USD 6,800/day, Ultramax USD 6,300/day and Handysize USD 5,100/day. Considering the daily-equivalent cost of a financing, fitting and operating scrubber is a fraction of this, the financial incentive to fit a scrubber remains strong, MSI added.

There is likely to be upward pressure on both the price of scrubbers and the time it takes to install them, despite lower costs to produce scrubbers as the industry matures. This could potentially leverage the value of a vessel already fitted with a scrubber on January 1, 2020. MSI predicts.

“The strong cost savings potential will have a positive impact on values of assets with scrubbers fitted as long as a time charter premium exists. Theoretically, the value of a scrubber being installed can be calculated as the net present value of all future cash flows of the scrubber, including revenue, costs and terminal value,” adds Fray.

In MSI’s view, the price differential between low sulphur fuel oil and heavy fuel oil bunkers will remain for several years beyond 2020, sitting at the top end of the historical premium range between HFO and MGO.

The comparatively lower cost of HFO could also create an incentive for owners and charterers to negotiate the sharing of cost-savings accruing from a vessel fitted with a scrubber, based on the undoubted difference in expectations for fuel costs between the two parties.

The second wave of scrubber ordering has seen over 1,000 scrubber projects confirmed over the past six months, according to the data from DNV GL.

The scrubber boom ordering this summer was mainly driven by the upcoming enforcement of the 2020 sulphur cap, as majority of the orders placed are intended for retrofits.

Currently there are 1,850 ships with installed or confirmed scrubber systems installations, and DNV GL estimates that 2,500 of ships would be fitted with scrubber systems by 2020.