Environment, Sustainability, Magic?

September 17, 2019

London International Shipping Week has progressively developed into a forum for serious debate and discussion and a venue for some forward thinking about the big issues facing the industry.

The first day saw class society ABS bring together a shipowner, charterer and banker to discuss sustainability and decarbonisation. So far so on-message but in the course of an afternoon, many of the preconceptions about how each of these are prepared to interact were washed away.

To start with the money, CEO of JP Morgan Global Transport Andrian Dacy laid out the new agenda in a world where finance will be gained in accordance with the Poseidon Principles. The big sources of capital he said have already moved towards funding clean projects and away from dirty ones.

“There’s not one institutional investor that is not one not thinking about the Environmental Sustainability and Governance agenda; all investors are looking at it and pursuing solid, reputable ESG standards. [Shipowners] not employing an ESG strategy will find it increasingly difficult to get capital,” he said.

The ESG agenda is already having an impact on how banks lend and Dacy said that in future companies that chose not to adopt it would have impeded access to capital. Banks he said, will also focus on areas like stronger balance sheets, longer term employment and delivery of results.

The embrace of ESG principles should be seen as a worthy way of harmonising financial and environmental goals, he added. “The big names are acting and the reality is that the biggest pools of capital have made it a priority. It may not trickle into your business straight away but these banks move the market CIOs or finance are all thinking that way; it’s part of a broader industry conversation.”

To John Michael Radziwill, CEO of CTM, the challenges are all of a piece. If access to capital comes with a proven track record making money then it is possible to do so in a way that can be good for environment, the market and investors. “We are part of that evolutionary process – we can play our part.”

But he sounded the first of many notes of caution about how the industry could lower its emissions in practice. The CTM business model is buying older ships and running them efficiently and unsurprisingly he advocated balance. “The industry became anaemic because it was overbuilt. There is no need now to jump in and order ships that are a bit more fuel efficient, that’s not a solution. What we have to do is use what we have in the most efficient way possible.”

To Radziwill, that means extracting a premium from charterers because this revenue supports the industry. “What you get paid filters through and keeps us living so we can price ships accordingly. If we can slow steam we can be more efficient and we’re going to have to do it ourselves, there’s no other way.”

To Rasmus Bach Nielsen, Global Head of Wet Freight at Trafigura, one of the world’s biggest charterers, the solution is simple, if revolutionary. “We don’t mind paying more [for more efficient ships], but we want to be aligned with carriers. Historically it’s been a deep challenge and we need to collect all industry participants.”

The Poseidon Principles are the first step, he said but charterers need to take the next, to pay more for freight without being disqualified from trading profitably. “As an industry we need to say where do we want to go – where is the vision? Can we get there by 2030? If so then slow steaming is the biggest low hanging fruit. We have to speak seriously with IMO about how that will work,” he said.

That efficiency and profitability go together should be obvious and Radziwill believes that digital technology can help ‘in a major way’. To an industry starved of capital for a decade the key is to ‘play the hand you are dealt’, increase automation and you improve your bottom line.

Part of that solution is virtual arrival [slowing down and speeding up to optimise port calls]. “It’s doable but it needs the IMO because if you don’t get in the queue you may lose your turn. We can spend money on this but it needs political support and if we can ride the momentum we can capitalise as an industry,” he said.

Was Radziwill prepared to give away the inefficiency (in which owners traditionally make money) in the cause of decarbonisation? “100% yes. If the best thing going forward is less congestion, so be it. If we can match the most efficient ship to the right cargo at the right time we will be better off. It’s the way forward, a positive evolutionary step.”
That transparency will mean that stakeholders can see the good they are doing and so much the better was the consensus, but Nielsen went further.

“There is a risk of losing in a transparent market but if the industry can move towards that, it’s positive. We can track and monitor ships and let’s be draconian, if you break the speed limit, you lose your licence,” he suggested.

A positive driver to the process is the continuing consolidation of shipyard capacity; itself long overdue, but now given new impetus by the need to bring more technology onboard, according to Nielsen. “Even in a good market it’s difficult to push technology and hard to take on costs. The consolidation could not have come better time because it will push technology and enable the yards to be as strong as possible.”
But he cautioned that most shipyards are not ready to build LNG fuelled ships at scale, even with the technology cost falling, not least because LNG doesn’t solve the decarbonisation problem [due to methane slip]. “No-one is going to be spend $10m extra on something that doesn’t reach the end goal,” he added.

Amid the glee, it must be remembered that neither more efficient ships, slow steaming or digital port arrival will get the industry to a 50% reduction in carbon intensity by 2050 – though they might get it to 40% in 2030. Huge amounts of work are needed to achieve the former and the tools are not yet in place.

ABS CEO Chris Wiernicki summed up the challenges rather neatly. “The fuel of the future is not LNG, or hydrogen or methanol, or a magic elixir yet to be invented. The fuel of the future is ideas.”