Coronavirus disrupts scrubber retrofits

SHIPOWNERS with scrubber installation commitments have been scrambling to secure yard slots outside China for the required retrofits following the coronavirus outbreak.This is despite a collapse in the scrubber earnings premium that may have compromised new investments in the abatement technology.

The coronavirus outbreak in China is expected to hold back scrubber retrofits for many months and concerns regarding travelling to the country are hindering these jobs to getback on track. Citing market data, Rajan Pradeep of S&P Global Platts noted that globally about 200 commercial ships are believed to be waiting at yards for scrubber retrofits. Roughly 140 to 150 are said to be in China, of which more than 60 are dry bulk carriers, he added. Shipyards in China have been reportedly running with a workforce of 50% or less since late January as a result of the coronavirus outbreak.

Despite the Chinese government taking steps to ramp up industrial activity including at shipyards, this approach does not seem to have assuaged fears because many shipowners have sought to divert repair and retrofit work. Singapore-based Sembcorp Marine has seen enquiries for general ship repair and upgrade work jump 30% since the outbreak. Marco Polo Marine, which operates a yard on the Batam Island off Singapore and Indonesia, has also received similar enquiries spilling over from China. These may or may not call for scrubber retrofits, but one broker pointed out that many service engineers involved in jobs on the abatement technology are unwilling to visit China.

Meanwhile, scrubber earnings premium — defined as term charter earnings differential between ships with and without scrubbers — have tumbled as the price spread between compliant and non-compliant fuel oil narrowed. Platts-assessed scrubber premium at $4,758 per day on Tuesday, down from $12,246 on January 3. The energy and commodity pricing agency assessed the spread between Tuesday trades from Singapore on 0.5% sulphur fuel oil, known as very low sulphur fuel oil, and 3.5% fuel oil, or high-sulphur fuel oil, as more than halving to $154 per tonne from levels seen in January. A narrower price spread between the compliant and non-compliant fuel oil, or VLSFO and HSFO, would lengthen the payback period on scrubber investments. Notwithstanding the changing market forces, Mr Rajan said that shipowners to have already sunk in millions of US dollars in scrubbers, would want to proceed with the retrofits, albeit with clear preference towards yards outside China. Also, scrubber earnings premium for the dry bulk market is still “staying in the black”, suggesting owners facing retrofit delays there would have missed out on additional earnings, he added.

In the container shipping space, owners that have completed scrubber retrofits earlier are deemed as having the early mover advantage compared with the rest of the pack. Alluding to “an arms race” on this front, Sea- Intelligence argued that shipping lines stand to shave their bunker surcharges if they move on scrubber investments first and recoup them earlier on. This can improve their competitive standing especially on Asia-Europe and other long-haul trades. That said, yard slots available for retrofits outside China have proved difficult to secure.

An escalation in the number of coronavirus infections in South Korea has cast doubts on the feasibility of diverting ships to capable yards there. In Singapore, Sembmarine — a yard of choice for ship repairs in Asia — has said it “will be accepting bigger repair and upgrade packages diverted from China for smaller sized ships” that its spare capacity can accommodate.

“We will try to make room for jobs involving bigger vessels in the later months, including scrubber and ballast water treatment system retrofits,” said a spokesperson. Shipowners have also started looking to small to medium-sized yards in Asia because many may possess the capacity or be inclined to take on scrubber retrofits. Marco Polo Marine for one, has recently upsized its dry dock to accommodate bigger vessels but for now, chief executive, Sean Lee, expressed greater interest in pursuing installations of ballast water treatment systems. Shipowners — especially those to have already sent vessels to China — appear to have far limited options available to mitigate delays on committed scrubber retrofits. In the event, these owners decide to stay put with yards in China, they need to factor in many more months for the retrofits to be completed. Bunkering industry veteran, Simon Neo suggested that work in Chinese yards, including scrubber retrofits, may not reach full capacity until early April when the authorities in China forecast that the outbreak may be contained.

Not all shipping sectors, however, are equally exposed to the delays. Alphaliner’s founding principal consultant, Tan Hua Joo said that most container lines are “well in advance with their scrubber installations despite the coronavirus-related delays”. They have made their orders “months in advance” and “even the laggards have increased their order tally”. By Alphaliner’s estimate, ships to be fitted with scrubbers or fitted with scrubbers would make up about 40% of container shipping capacity in teu terms. In the dry bulk sector, which accounts for a large chunk of retrofit orders, Mr Rajan said the now-lower scrubber earnings premium have put ships without scrubbers in better position to compete for long-haul charters. But shipowners previously said to want to base their scrubber calls on the six-month numbers to this June, need to understand the premium — as with the fuel oil price spread — depends on other evolving market forces. Mr Rajan highlighted several of these that may not move in line with each other. The Organisation of the Petroleum Exporting Countries is widely expected to cut crude production. China’s refiners are running at 40% to 50% of capacity following the outbreak could also curtail production of VLSFO in the short to medium term.

These are factors likely to support VLSFO prices and scrubber investments. On the flip side, China is sitting on sizeable inventory of clean petroleum products and this would in turn weaken gasoil prices if there was lower demand. Lower gasoil prices may well entice shipowners to switch to burning compliant marine gasoil and this works against further scrubber investments. According to DNV GL’s Alternative Fuel Insights, scrubber-fitted ships on order and in operation would number 3,947 this year, with dry bulk carriers making up a third of these, followed by containerships at 820 vessels. Lloyd’s List Intelligence data showed the abatement technology is deployed on more than 2,700 vessels. 

Article Source: lloydslist​ by HweeHwee Tan, Cichen Shen