How will new environmental requirements affect the shipbuilding market

By Tan Song & Fan Wei & Qi Kai

Increasingly stringent environmental protection requirements are profoundly affecting the global shipping and shipbuilding market. At the beginning of 2016, the nitrogen oxide emission standard Tier III in emission control zone formally entered into force, and the new ships built after this period are required to meet the requirements of Tier III. Since 2017, with the warming of the shipping and shipbuilding market, the volume of new shipbuilding has increased. At the same time,the international ballast water convention, the upgrade of global sulfide discharge requirements, the expansion of the NOXemission control area and the greenhouse gas emission are also on the agenda. The increasingly strict environmental protection requirements affect the investment decision of shipowners.

According to the decision of the seventy-first meeting of the Maritime Environmental Protection Committee of the International Maritime Organization (IMO), new ships built since September 8, 2017 and later should meet the discharge standards of D-2 ballast water treatment at the date of delivery, that is, the ballast water management system (BWMS) should be installed at the time of delivery, while there is a certain buffer period for aged ships, and ships built before June 8 2019 need to meet the D-2 ballast water treatment emission standards (2024 at the latest) when the first international certification of fuel Prevention Certificate (IOPP) is renewed after September 8, 2019 and later.

At present, there are more than 94300 ships in the world,besides the ships which have installed the BWMS and only navigated in coastal area, about 24000 ships are expected to install ballast water management system in the future.

Due to the high price of the ballast water management system, the shipowner needs to take into account the factors such as ship age, route, freight rate, shipbuilding price and modification investment, among which the most important factor is the age of ship. Taking VLCC as an example, the price of a 15 year old VLCC is about$25 million. The corresponding ballast water system is purchased at about $3 million, the installation cost of entering the dock is about 1.6 million dollars, the ship dismantling price is 18 million dollars. The loading ballast water system for the ships above 15 years old will not be economical. The early dismantling of old ships will bring certain replacement needs, thus contributing to the recovery of the new shipbuilding market.

In the long run, greenhouse gas emission requirements are more stringent, which will suppress the development of the crude oil shipping market and promote the development of the LNG carrier market. In order to achieve global temperature control targets, the market reduction mechanism is imperative in the future.Although the cost of fossil fuels, especially crude oil,may remain low, the existence of carbon tax will make it more expensive, thus reducing the demand for crude oil. It is expected that after 2030, the global demand for crude oil will reach the climax. The use of clean energy is imperative in the future. Before the clean energy technologies such as wind energy, solar energy, nuclear energy or hydrogen energy are fully mature, natural gas will be the good energy for transition, the demand of LNG will continue to grow over a long period of time,which will continue to promote activeness of the new LNG ship market. In addition to the replacement of fuel,the promotion of the overall industrial chain eff i ciency is also the development trend in the future. Intelligent ships based on cloud computing, internet of things, artificial intelligence and other technologies may be one of the many options.

In the medium and short term, the probability of dismantling aged ships due to the rising cost of environmental protection has increased. The installation of the ballast water management system, the limitation of the sulfur emission, the expansion of the NOx emission control area or the control of the greenhouse gas emissions will all bring the rising cost to the shipowners,even if there is a possibility of cheating, the moral cost should also to be taken into consideration. Some ships with low efficiency, high energy consumption and aged ship will be dismantled ahead of time. At present, the total global fl eet is 1.945 billion DWT, of which ships of 15 years age and over are 370 million DWT, the survival probability of this part of the fleet will be considerably lower than that of environmental regulations, especially from 2019 to 2024. This brings some alternative update requirements. However, considering that there are varying degrees of excess in the current ship types, the substitution rate of ships will be lower than that of ship dismantling. At the same time, the ahead-of-schedule dismantling of ships will also bring down the volume of dismantling after 2024.