Shipping regulation and the EU Emission Trading Scheme

The premium surcharge, which overstayed in the trans-Pacific route and later in other ex-Asia routes for nearly a year, is expected to continue at least through the first half of 2022 due to firm demand and worsening schedule reliability, despite reports of easing in some regions post China’s Golden Week holiday.

“Premiums would most likely stay on East-West trades and also Asia-Oceania due to strong demand and absence of new capacity, stubborn port congestion in the US, Europe and Asian transshipment hubs and the blank sailing programs,” Peter Sundara, Global head of ocean freight for a major cargo owner said.

The fact that coronavirus is still around with many areas in Europe going into shutdown, and the US and other regions susceptible to disruptions too, makes it look like the premiums will stay, a carrier source said. “Unless the availability of vessels and empty containers improve, there will always be too many cargoes for carriers to choose from. Shippers will obviously need to pay premiums to get timely loading.”

The premium rates gained prominence in November 2020, when carriers started levying extra fees for confirmed space or timely bookings amid vessel shortage and shipment delays. While initially the premium fees were around $1,000-$2,000 per container, it has increased two-to-four times in the last one year.

Platts Container Rate 5 — North Asia-to-East Coast North America — was assessed at $10,000/FEU on Dec. 2, against $4,800/FEU a year ago. The Platts container assessments denote the FAK (Freight All Kind) spot rates. The all-inclusive premium rates are currently at $11,000-$14,000/FEU on North Asia-to-East Coast North America route and $16,000-$19,000/FEU for Southeast Asia-to-East Coast North America.

However, the premium rates have eased by nearly 20%-25% since Chinese Golden Week holiday in October due to a slowdown in demand and reduced production at the factories amid a power rationing in China. The rates for North Asia-East Coast North America route peaked to $22,000-$25,000 per FEU, with some deals heard at $30,000 per FEU, in during July-September.

North Asia-US premiums seem to be stable or minimal right now, but they will become more prevalent again as demand outweighs supply ahead of the Lunar New Year holiday, and shippers outbid one another for space as we saw during July-September, a US based freight forwarder said. According to some other sources, premiums are heading up fast again, especially from MSC for December-January sailings.

“Despite this recent dip in exports, carriers see the Chinese and Southeast Asian markets as their big money makers and will continue to prioritize them,” Bhavik Bhanushali, Pricing Manager (India), Parekh Integrated Services Pvt. Ltd. said.

With the congestion at American ports currently, they might avoid for a short period diverting the vessels to the Africa, Australia and Middle East markets but the demand to the US is expected to pick up again, he added.

Contracts and co-loaders

The nature of long-term contracts and presence of sub-forwarders/co-loaders remain crucial to determine the quantum of premium surcharges in 2022, sources said.

One of the reasons why premiums were at such high levels in 2021 was co-loaders re-selling space at exorbitant levels to shippers who were struggling to secure space and equipment, Sundara said.

Going ahead, if the big retailers and large NVOs lock-in long terms deals that come with space and equipment guarantee, the co-loaders might have a smaller pool of FAK space to re-sell into CIF (Cost, Insurance, and Freight) market, he added. “They can either re-sell them at higher premium or at lower depending on demand. We have to wait and see how this space develops.”

There may also be instances where carriers avoid offering contracts to certain big-scale freight forwarders, a logistics provider based in India said. “They offered space to them at such low rates – $6,000/unit from Asia to US or Europe-but the forwarders then sold that space to consumers at two-to-three times the contract rate…a trend that saw a major carrier restrict forwarder bookings on the larger routes.”

Another thing that might shape the premiums landscape is how strongly the carriers flex their full-scale offerings going beyond just the ocean freight, sources said.

“Some carriers are telling shippers they will only be able to carry or release bookings if they pay for the full deal – warehousing, ocean freight, truck, or rail service to inland point of delivery – for which the carriers can now create their own fees since they control all the aspects. Eventually, the shippers will be left with no choice but to pay them,” a source based in India said.

Asia-Europe remains exception

While premiums have become a norm on not just the long-haul but also the short-haul routes, Asia-Europe trade has largely been free from it so far. This trend is largely expected to continue going forward, with the lion’s share of trade taking place on FAK (Freight All Kind) basis, in contrast to the movements in the Pacific Basin.

Container rates from Asia-to-Europe are seeing some downside as the end of the year approaches, with almost all Christmas demand covered. However, with Lunar New Year just around the corner, expectations remain in the market that rates will further come down, likely stymieing the need and expectation for premiums to emerge on the Asia-to-Europe trade lanes in near future.

TotalEnergies remains upbeat on the uptake of LNG as a bunker fuel as stricter international rules loom in global shipping, viewing the fuel as a financially stable route to biomethane use.

This scenario would work well for the company, which is a significant gas producer. Its production averaged 2.87 million boe/day average in 2020 and around 55% of that was gas, the company said on its website.

TotalEnergies started planning planning to deliver cleaner marine fuel solutions several years ago through a range of investments in LNG infrastructure at key bunkering hubs and other initiatives, it said in a recent report, with the company taking delivery of is first chartered LNG bunker vessel–Gas Agility–in August 2020 following the signing of a time charter party agreement with Mitsui O.S.K. Lines, Ltd. in February 2018. It is also currently the world’s largest supplier of LNG as a bunker fuel.

In 2021, Total Marine Fuels, a part of TotalEnergies, was awarded a LNG bunker supplier licence by the Maritime and Port Authority of Singapore, for a five-year term starting January 1, 2022 in the city-port.

FueLNG and Pavilion Energy Singapore already exist as licensees in Singapore, the world’s largest bunkering port, which recorded sales of 50,000 mt of LNG bunkers in 2021 and saw its first ship-to-ship LNG bunkering operation completed in March.

Today, there are 26 LNG bunker vessels in operation globally and the fleet will grow to 43 units offering an aggregated capacity of between 7 and 8 million tonnes per year by early 2024, TotalEnergies said.

TotalEnergies forecasts the LNG bunker market could reach 10 million mt a year by 2025 and represent 10% of the bunkering market by 2030.

LNG provides immediate benefits

In April 2018, the IMO laid out its strategy for the shipping industry to reduce its total GHG emissions by at least 50% from 2008 levels in 2050.

SEA-LNG, a multi-sector industry coalition established to demonstrate LNG’S benefits as a viable marine fuel, last year said that an independent study reconfirmed that greenhouse gas reductions of up to 23% were achievable from using LNG as a marine fuel, depending on the marine technology employed.

LNG also comes with numerous other advantages– it is a proven and mature technology, is readily available, has a rapidly growing bunkering network.

Although LNG has been criticized for its contribution to methane slips, engines are being developed to address this issue. LNG’s viability is proven on a well-to-wake basis, and depending on the technology employed, is capable of reducing GHG emissions by about 23% compared with standard conventional fuels, an independent study commissioned by industry coalitions, SEA-LNG and SGMF, stated.

Hapag Lloyd and CMA CGM are among global shipping companies championing the use of LNG as a marine fuel by putting in orders for LNG-powered ships

In Asia, AET, a subsidiary of MISC Berhad, remains committed to using LNG as a marine fuel, while Japan’s Mitsui O.S.K. Lines also plans to launch 90 LNG-fueled ships by 2030.

Shippers, however, currently have to pay high prices for the fuel.

S&P Global Platts assessed LNG as a bunker fuel at Rotterdam at $26.26/gigajoule/cu m Jan. 18, compared with $20.35/gj/cu m for methanol as a bunker fuel at the port and $15.88/gj/cu m for delivered 0.5% sulfur fuel oil, the currently prevalent bunker fuel.

The next step

“As a next step in its evolution, we believe that biomethane, together with LNG, can provide a viable pathway to achieve shipping’s decarbonization goal. The biomethane market is growing and has huge opportunities to become a global industry,” TotalEnergies said.

In 2020, biomethane production reached about 50TWh globally via supply from 1,100 operating plants and this has the potential to grow to reach a capacity of 8,500 TWh, the company said.

Estimated sustainable global supplies could potentially exceed the future energy demand of the global shipping fleet and bioLNG will likely be commercially competitive relative to other low- and zero-carbon fuels.

S&P Global Platts Analytics expects around 60% of total bunker demand to be replaced by alternative fuels to achieve IMO’s 2050 emission reduction targets.

Expanding LNG-fueled fleet could enable a pivot to bioLNG without needing to undertake any modifications, meaning the existing supply infrastructure would be fit for bunkering purposes with either fuel when bioLNG becomes scaled up, TotalEnergies said.

“This benefit alone will help reduce the capital outlay for brand new alternative fuels infrastructure, which it is estimated, could run into trillions of dollars,” the company said.

The company believes biofuels is an option for today. It plans to increase biofuels production capacity from 0.3mt/year in 2020 to 2mt/year by 2025 and 5mt/year by 2030.

To effect that, TotalEnergies is seeking to develop existing assets, such as its La Mede biorefinery, which was converted from a conventional refinery in 2019 and has the capacity to produce 500 KT of biofuels annually.

A long-term alternative is hydrogen. In July 2020, TotalEnergies set up a Clean Hydrogen business unit, with the goal of shaping the company’s ambition to become a large-scale producer of carbon-free hydrogen.

The UAE has signed up the Abu Dhabi unit of Italy’s Eni to establish a marine logistics base at its Mugharraq Port near the country’s Ruwais industrial hub to support offshore drilling in the heart of Abu Dhabi’s Al Dhafra region.

The hub will be established through an agreement with Eni Abu Dhabi, the port’s operator AD Ports said Jan. 24. Mugharraq Port’s dedicated quay wall, marshaling yard and access to liquid mud and bulk plant facilities will be made available to Eni Abu Dhabi operations, it said.

Eni has several refining and trading activities with Abu Dhabi National Oil Co., and in 2020 it launched a joint venture aimed at low-carbon solutions for the reduction, capture, use and storage of CO2, according to its website.

It also supports ADNOC in its land-based electrification projects to supply its offshore production installations with energy from sources that produce lower CO2 emissions than gas.

In December, AD Ports said it was expanding Mugharraq Port and can now receive international vessels, benefiting from its proximity to oil and gas developments in OPEC’s third-biggest producer.

Mugharraq Port is close to the industrial hub of Ruwais, where ADNOC has a refinery, petrochemicals projects and other downstream facilities. The port is also close to Hail, Ghasha and other oil and gas projects which are begin developed by ADNOC.

The national oil producer plans to boost its production capacity by 25% to 5 million b/d by 2030 and is also ramping up natural gas output to achieve self-sufficiency in the fuel.

The port has heavy-lift berths, six dedicated Ro-Ro ramps and 85,000 sq m of yard, providing general cargo handling and bulk and break-bulk shipping.

As tanker markets continue to endure the impact of the global pandemic and the recent omicron variant of the coronavirus, which offset expectations of a bullish fourth quarter, tanker owners anticipate changing trade lanes and increasing ton-mile demand could turn spot freight north after a year of breakeven-to-negative time charter equivalent earnings.

Nearing the end of 2021, Americas VLCC rates failed to capitalize on historically bullish winter seasonality supported by increased crude exports and a stronger refining landscape. Rates capped out at $5.6 million for the VLCC USGC-China run at the end of October, and have since fallen to a range of $4.6-$4.65 million during the first two decades in December. Comparatively, pre-pandemic fourth-quarter rates traded at an average of $8.15 million in 2018 and at $11.84 million in the geopolitically-driven 2019.

However, the return of global oil demand to pre-pandemic levels and the further return of OPEC+ crude barrels to the market could play into stronger VLCC freight out of the Americas into 2022, supported by US crude export dynamics.

Oil demand is expected to grow by 4.8 million b/d in 2022, which would leave it slightly above pre-pandemic levels of 100 million b/d, S&P Global Platts Analytics data showed. This number could be slow to rise heading into April and May 2022 but is expected to firm mid year, according to S&P Global Platts Analytics.

Asian crude imports drive recovery

All eyes remain on Asian crude import markets, namely those of China, South Korea and India, to drive demand recovery and take responsibility for what Platts Analytics sees as 38% of total growth. Of that percentage, market participants expect to see higher utilization of USGC and Brazilian crude grades amid OPEC+ uncertainty and increased production out of the Americas. This trend would create an upswing in ton-mile demand as VLCCs make the longer-haul voyage to Asia versus the routes from the Arab Gulf to Asia and reposition to natural load areas.

On top of OPEC+ uncertainty, impending US Strategic Petroleum Reserve releases of 50 million barrels could push excess crude volumes onto the water if demand fundamentals remain supported. US exports have seen increases along with recent SPR releases, with most of those barrels headed to Asia, tanker owner Frontline said in its Q3 2021 earnings presentation. Rising US crude production also supports export opportunities, with Platts Analytics estimating a 1 million b/d increase in 2022.

Clean tankers bank on product demand

On the petroleum product side, clean tanker owners are looking forward to projections of increased product demand in 2022. Seaborne refined product exports are estimated to increase 5.1% in 2022, according to Scorpio Tankers Q3 2021 earnings presentation citing Clarksons Shipping Intelligence data. Product ton-mile demand is expected to increase 5.5% in 2022 on the back of changing refining landscapes globally.

While refined product demand recovered in 2021, freight remained depressed for the first half of the year due to continued effects of the pandemic. Spot cargo supply out of the USGC remained low, with refined product stocks in the region well under five-year averages. USGC refinery production took a hit in the weeks after Hurricane Ida made landfall in Louisiana Aug. 29 and knocked 2.2 million b/d, or around 70% of the state’s refining capacity.

WAF dents USGC flows to Brazil

Spot flows from the USGC to South America’s east coast fell dramatically in March 2021 and have remained lower than levels observed in previous years. Shipowners said the region was sourcing products from an open arbitrage out of West Africa, where newbuild VLCCs and Suezmaxes were anchored with clean products and lightering onto smaller clean tankers.

With mid-2021 dirty tanker earnings in the negative, the clean trade for the newbuilds led to more profit. Imports from West Africa into EC South America peaked in June and July at 48% and 43% share compared to product flows from the USGC and UK/Continent regions, data from Platts cFlow trade-flow analytics software showed, but decreased to 7% in October and to under 20% in the fourth quarter, as dirty tanker earnings improved.

Refining shift grows ton miles

Looking at the coming year, the addition of over 1 million b/d of refining capacity in the Middle East through 2022 will grow ton-mile demand as refining capacity will close or convert to import terminals in mature markets. Poten and Partners data showed 1.26 million b/d of capacity in the US is due to close or convert, in addition to 1.24 million b/d in the rest of the world.

Refining capacity will instead concentrate in regional hubs including the Middle East, North Asia, India and Singapore, in addition to the traditional West of Suez refining centers. Already, the diesel arbitrage from the USGC to Northwest Europe has remained mostly closed since the end of 2018, according to Platts Analytics data. Spot flows have declined on the route in favor of exports to South America. The commissioning of Nigeria’s 650,000 b/d Dangote refinery, possibly in 2022, could provide a more permanent shift in diesel flows from WAF to Brazil.

After navigating choppy waters for more than a year now, market sources fear that despite some signs of a rebalancing in demand and supply, the container industry faces another challenging year in 2022 — with port congestion issues set to remain a major pain point.