Scrubber boom about to end, says yard executive
As well as the incoherent economic argument for exhaust gas srcubbers, delivery schedules for the devices have sustained further delays due to the coronavirus outbreak. However, there are still some who believe the causes of the narrowing spread — the low oil price and muted fuel consumption — are just temporary disruptions
The deputy head of China’s largest shipbuilding group has noted vanishing interest among shipowners for exhaust gas scrubber installations. The price spread between VLSFO and HSFO has dropped significantly, thereby rendering the devices economically unviable
SHIPOWNERS’ appetite for exhaust gas cleaning systems as an answer to the global sulphur cap is quickly disappearing, according a senior Chinese shipbuilding executive.
The move — triggered by a series of factors, including the coronavirus shockwave — represents a turning of the tide from last year, when scrubber investors were flocking to yards for installations, said China State Shipbuilding Corp deputy head Bao Weidong.
“Coming into 2020, I think the boom of scrubber installation and retrofitting will soon be over,” Mr Bao told a panel discussion at the Capital Link International Shipping Forum, which became a digital conference this year due to the outbreak of coronavirus.
His remarks come after a recent report by Alphatanker, which forecast that cost-cutting and the erosion of marine fuel oil premiums would render the sulphur abatement technology redundant with a “flood of cancellations”.
Mr Bao backed that view, saying the narrowing spread between 0.5% low-sulphur fuel oil and 3.5% high-sulphur fuel oil used by scrubber-fitted vessels has been the main reason behind owners’ second thoughts.
The price gap had plunged to $50 per tonne late last month, from about $400 per tonne at the beginning of this year, according to Alphatanker.
This has reduced the earnings premium for vessels with scrubbers and extended the payback time for the $2.5m average investment to four years rather than four months for the largest vessels that have retrofitted the technology. Payback time will be even longer for smaller vessels, given the lower economies of scale.
“At the current price gap level, owners will be looking at their investment returns very carefully,” said Mr Bao.
The delivery delays and cost overruns have put another dampener on owners’ interest in the devices. The situation has only been exacerbated by the coronavirus fallout.
Hit by epidemic-led labour shortages, scrubber installations at some major Chinese yards are now at least 60 days behind schedule, Mr Bao said. “The later the delivery, the less investment return for shipowners,” he pointed out.
Fellow panellist Hing Chao, executive chairman of Hong Kong-based, family owned Wah Kwong, had similar observations.
“In truth, given there has been significant delay with dry-docking, and so on, a lot of scrubber installations have been delayed as far as I know.”
Wah Kwong currently has four scrubber-fitted vessels under construction, with two kamsarmax dry bulkers to be delivered by this summer and two very large crude carriers in the second quarter of next year, according to Mr Chao.
He said the market will continue to see deliveries of existing scrubber projects in 2020 and 2021.
“As to whether there will be more appetite beyond that, it depends on the outlook of the spread, but at this moment that is looking unlikely.”
Mr Bao further pointed to the fact that newbuildings fuelled by liquefied natural gas had been quickly rising to about 400 units today, suggesting this approach provides a good alternative to scrubbers for shipping companies to comply with the sulphur rules.
Nevertheless, one Chinese leasing executive offered some grounds for optimism to scrubber investors on the sidelines of the conference.
In his opinion, the current thin spread between very low sulphur fuel oil and high-sulphur fuel oil was largely caused by the double whammy of the extremely low oil price and reduced fuel consumption in relation to muted shipping demand.
He opined: “I think the decline in scrubber interest is temporary. The oil price will rise and shipping activities will recover after the coronavirus pandemic gets controlled.”
The executive added that many newbuildings nowadays are equipped with the so-called scrubber-ready design, which means they can be easily retrofitted at the quay in future.