Scrubbers are wild card for container shipping edge

The doubling down of container lines on scrubber installations amid a widening spread between low- and high-sulfur fuels will allow some carriers to better mitigate their operating costs tied to the International Maritime Organization (IMO) mandate than rivals, potentially spurring the former to grab market share. But the industry’s pivot to scrubbers is a gambit not just in that it hinges on high-sulfur bunker fuel prices staying significantly lower than low-sulfur fuels, but that regulators won’t further restrict scrubbers as environmentalists raise alarms. 

The rising role and risk of scrubbers — now set to be installed on 10 percent of the container ship fleet by 2020, double what was estimated at the start of the year — illustrates the challenge container lines have in mitigating their largest operating cost: fuel. Under pressure from even steeper environmental mandates and amid signs of “peak oil” — defined not by the end of economically feasible supply but a permanent reduction of demand as alternative energy output increases — how carriers handle energy costs will increasingly determine their fortunes and the competitive landscape. 

“If the price premium of [very low-sulfur fuel oil] is $100 to $150, this could translate into an overall 10 to 15 percent operating cost advantage for shipping lines with a larger share of scrubber installations,” Steve Saxon, a partner at McKinsey & Co. focusing on shipping and ports, told “These shipping lines may use their cost advantage to take market share, and, due to the competitive response, this risks the industry as a whole not being able to pass through the higher fuel costs as they hope.”

The case for scrubbers

Carriers were cautious in ordering scrubbers until the last six months, when they became more confident that investing in scrubbers — costing $2 million to $3 million on new vessels — held a cost advantage. Since then, the business case for scrubbers has only improved, with the spread between high- and low-sulfur fuels widening to approximately $250 per metric ton from about $200/mt a month ago, according to a price analysis of data from Oil Price Transportation Service, a sister company of within IHS Markit. As of Nov. 12, low-sulfur fuels at the port of Rotterdam were selling at $500/mt, compared with nearly $253/mt for high-sulfur fuels.

The changing economics of scrubbers spurred a policy change from Maersk, which last year said it would only install the exhaust-cleaning systems on a few ships. Now, the world’s largest ocean carrier has the third-most scrubbers on order of any line, with 140 confirmed vessel installations on both owned and chartered ships, according to maritime analyst Alphaliner. Mediterranean Shipping Co. leads in a scrubber-outfitted fleet with confirmed orders for 250 ships, followed by Evergreen Line with 140 ships. Ocean Network Express (ONE) remains the only top-10 carrier without scrubber orders confirmed. In its half-year results released in October, ONE said it was still studying the feasibility of installing scrubbers on some of its larger container ships and would rely on compliant low-sulfur fuel to meet the requirements of the IMO 2020 regulations in the short term.

“ONE in particular will be exposed to the higher cost of low-sulfur fuel, due to its reluctance to move ahead with scrubber orders,” Alphaliner said in its Nov. 5 weekly newsletter. Comparatively, having already made decision on scrubbers, MSC and Maersk will have more than 35 scrubber-fitted ships of over 18,000 TEU by January 2020, and all 62 of their 18,000 to 23,600 TEU mega-ships are expected to be fitted with scrubbers by 2021, Alphaliner said. “This will allow the carriers to run some six Asia-Europe strings at higher speeds than currently, giving them a competitive edge,” it said. Or carriers could sail the ships at normal speeds and keep their fuel bill lower than alliance rivals. 

In the last nine months, the share of container fleet expected to be outfitted with scrubbers before the Jan. 1 start of the IMO’s mandate has increased from between 3 and 5 percent to 10 percent, according to IHS Markit and McKinsey estimates. More scrubber installations are on the way for 2020 beyond what the orderbooks show, according to conversations with executives at three major container lines. 

No guaranteed advantage

Fuel prices are still fluid, and the IMO-spurred downshift in production of high-sulfur fuel oil (HSFO) from 3.5 million barrels daily to 1 million barrels will cause a “resurgence in the HSFO market and prices,” according to Damian Kennaby, IHS Markit’s executive director of oil, midstream, downstream, and chemical. There’s also the risk that smaller bunkering hubs phase out high-sulfur bunker supply, reducing the number of ports where carriers can operate scrubber-outfitted vessels. 

Beyond high-sulfur bunkering limitations, carriers also risk a scrubber regulatory backlash. According to Reuters, Singapore and China, and individual ports in Finland, Lithuania, Ireland, and Russia, have banned open-loop scrubbers, which release water used to clean the exhaust gas during sailing. A German study, released in 2015, found that discharges raised the temperature and transparency of the water, a metric of quality, in the North and Baltic seas, adding further stress to marine organisms already hurt by shipping traffic. Earlier this year, Carnival Corp. responded to criticism of its usage of scrubbers and said the equipment will reduce its low-sulfur output below the 0.5 percent requirement. A representative of a scrubber manufacturer said last month that two new studies will help relieve industry concerns about the open-loop technology and put an end to the bans, as reported by Argus Media

Closed-loop scrubbers, which are more expensive and less popular than their open-loop counterparts, retain the majority of the water used in the cleaning process before being disposed of at ports. The British Port Association last month voiced concerns about the long-term contamination risk of such sediment disposal, according to The Independent. The pushback will likely only increase even as carriers work to brandish their green credentials by investing toward long-term decarbonization goals.