Bifurcation of the dry bulk fleet

LLoyd's List article: https://www.lloydslist.com/LL1157106/Bifurcation-of-the-dry-bulk-fleet

Tightening regulation causing split between more efficient and less efficient tonnage
Gap between prepared and less prepared owners ‘widening’
Questions over whether split will be drawn down geographical lines or simply on price premiums for newer vessels

by Joshua Minchin

Fragmented emissions rules and a fading prospect of a global carbon price are pushing the dry bulk sector towards a two‑tier market, as efficient, well‑managed vessels gain a trading advantage and older tonnage risks being squeezed into narrower, higher‑risk segments

LESS ENERGY-EFFICIENT BULKER VESSELS MAY BE DISPLACED INTO TRADES WITH LOWER ENVIRONMENTAL REQUIREMENTS.

TIGHTENING regulation is expected to create a two‑tier dry bulk market, dividing modern, efficient tonnage from older, less efficient vessels.

That’s the view of several key players in the bulker market, as the International Maritime Organization looks increasingly less likely to adopt a global carbon price by which all shipowners would be bound.

Instead, a possible alternative scenario is regional, fragmented emissions regulation, with other nations and regions implementing their own version of the European Union’s Emissions Trading Scheme and FuelEU

policies.

DNV business director of bulk carriers, Morten Lovstad, said regional environmental regulation in lieu of a global carbon price could split the bulker fleet, with more efficient tonnage gravitating towards regions covered by emissions schemes.

RightShip head of marine excellence Taner Umac said there was a “possibility that older, less energy-efficient vessels may be displaced into trades with less stringent environmental requirements”, if pressure from regulations, such as FuelEU/ETS, continues to ratchet up.

“Historically, regulatory shifts have influenced trading patterns in this way.”Ariston Navigation chief executive and Intercargo chairman, John Xylas, said FuelEU, ETS, the IMO’s Carbon Intensity Indicator and “all sorts of acronyms” were already widening the gap between “the prepared and less prepared owners”.

“This is a reality,” he said. “It is creating a two-tier market, the well managed and compliant on one side, and the poorly managed, not so compliant on the other.”

Vessels in tier one, the less efficient tonnage, could burn up to 50% more fuel than vessels in tier two, the more efficient tonnage, Drydel Shipping chief executive Costas Delaportas told Lloyd’s List.

His company’s fleet is among the most modern, with an average age of two years. Delaportas said Drydel is seeing “huge demand” for its more efficient vessels, particularly amid the Middle East conflict and the resulting surge in fuel prices.

If a global carbon price is not agreed, as is now expected by many, and instead shipping must contend with a fragmented regulatory landscape, then ageing vessels will likely continue to have a market in the future, albeit a more constricted one.

The average age of the dry bulk fleet has increased between three to four years in the past 10 years to around 12 years old. Scrapping in the sector has steadily slowed since 2020, as owners continue to find employment for vintage tonnage.

That employment could continue, but only in certain areas. If it does, then class societies must ensure safety standards are upheld, said Bureau Veritas president of marine and offshore, Alex Gregg-Smith.

This point was raised by RightShip’s Umac, who reiterated the possibility of older tonnage being concentrated in regions or market segments that remain profitable, “potentially creating pockets of elevated risk, particularly where oversight and enforcement are less consistent”.

But older doesn’t necessarily mean bad. “Well-maintained older ships, operated by high-performing owners, can and do operate safely, while newer vessels are not immune to risk where operational practices fall short,” Umac told Lloyd’s List.

DNV’s Lovstad said his organisation too was “worried” about ageing vessels continuing to trade. Preliminary findings from investigations his team conducted into the capesize sector suggest that good maintenance and operation are more important factors than age when it comes to vessel performance.

Xylas said the two‑tier market would hinge less on vessel age than on “quality management and expertise”.

He added that it is not simply a matter of dividing the world into regions that require modern vessels and those that do not.

Olivia Lennox-King, chief operating officer of Cetus Maritime — which operates a fleet of more than 30 bulkers, said that given how smaller vessels trade it was unlikely owners could afford to separate vessels by region.

“My vessels trade from A to B, then B to C, then C back close to A to reduce ballast.”

Instead, more efficient vessels were more likely to command premiums than if split geographically.

“Your ‘eco-ship’ would be earning $15,000 [per day] and your non-eco would be earning $10,000 or $12,000,” she told Lloyd’s List.

Maybe, with a big enough fleet or a particularly niche trade, owners could send older vessels to trade purely in certain regions where they are most (or only) profitable, she explained.

“But more likely, you’ll see a pricing differential.” So, what do you do as an owner?

Asset prices are still high, therefore so-called “non-eco ships” may be appealing secondhand options to some.

But as Star Bulk commercial director Milena Pappas noted, there are now far more variables to weigh up, including a bunker landscape that makes ballasting these vessels either prohibitively costly or, in some cases, unworkable, even before widespread environmental regulation takes effect.

“I don’t know what I would do, to be honest with you,” she said.

If an owner were to buy a 2009-built non-eco, “and you just project that for the next two, three years, it’s going to be relevant and if freight market earnings are going to be high enough, then go for it”, she said.

But while there is disagreement over exactly where the dividing lines will fall, it is increasingly clear that market forces and regulatory pressure will determine which vessels can trade profitably in specific regions and trades.