GE Shipping to see capex jump on alignment with IMO sulphur limit norms

Company could mitigate opex push via time-charter route

Great Eastern Shipping, the country's largest private sector shipping company, will see its operational expenses and capex jump as it prepares to comply with the International Maritime Organization (IMO) 2020 global sulphur limit.

"Currently, we are doing some study on couple of sample ships and we will zero down on the fuel option or a combination of options latest by early 2019," G Shivakumar, executive director and chief financial officer told Business Standard.

IMO has set a global limit for sulphur in fuel oil used on board ships of 0.50 percent m/m (mass by mass) from 1 January 2020. The current global limit for sulphur content of ships' fuel oil is 3.50 per cent m/m. Under the new global cap, ships across globe will have to use fuel oil with a sulphur content of no more than 0.50 percent m/m, against the ongoing limit which has been in effect since January 1, 2012.

At present, the shipping industry has three options—usage of scrubber, low-sulphur fuel and usage of blended fuel, to align itself new global sulphur limit. Of the three, fitting of scrubber is the costliest option ranging between $2.5 to $4 million per equipment. This is followed by usage of low-sulphur fuel which is priced about $200-$220 per tonne higher compared with currently used high sulphur fuel. The blended fuel option is priced between the high and low-sulphur fuel but has technical glitches in terms of its viscosity and perhaps uniform availability of the fuel across globe.

GE Shipping, however, is evaluating the costlier scrubber option for select vessels, mainly the Capesize ships. "If we use scrubbers, it is our capex which will go up as a new fitting has to be made in the vessel. Alongside, it would also call for some amount of operational expense as power consumption of the vessel would increase,” informed Shivakumar.

GE Shipping has one capesize bulk carrier and two very large gas carriers as part of its total 49-vessel fleet. The average age of GE Shipping's fleet is about 9.78 years.

On the other hand, the low-sulphur fuel option will push up only the operational cost of GE Shipping.

“The low-sulphur fuel option will push up only the operational cost for us but depending upon how many vessels are on time charter, the impact would vary. Also, if the market is strong, this cost would be passed onto customers in the spot market,” informed Shivakumar.

Currently, about 10 per cent of GE Shipping's fleet is on time-charter which means that the fuel cost is being borne by the charterer and not the ship owner. The proportion of time-chartered vessels to the total fleet varies depending upon freight rates and not the fuel cost. “Once the new global cap comes in, fuel cost may be taken into consideration during time-chartering of vessel but it will definitely not be a decision making factor,” said Shivakumar. 
 

Typically, a shipping company of the size of GE Shipping consumes about 150,000-tonne fuel annually. A price differential of over $200 per tonne (at present) would accordingly increase the total fuel bill of the company.

No matter what option GE Shipping is to choose to comply with the IMO 2020 norms, its operational costs going up is inevitable. However, brokerages are of the view that the company will be able to tide over the change.

“GE Shipping has a strong balance sheet and has already budgeted the increase in compliance cost for shipping due to sulphur norms. However, shipping companies with older fleet and high debt could have an issue,” said Vikram Suryavanshi, senior analyst with Philip Capital.

Shipping Corporation of India, Essar Shipping and Seven Island Shipping among others are some of the shipping companies in the domestic market.
 

Apart from sulphur norm compliance, ballast water treatment is another set of norms the global shipping industry has to align itself with, deadline for which is 2023-24.

“We already have about seven vessels that are aligned to the ballast water treatment norms and the remaining we plan to executive during their dry-dockings in coming years. We will meet the compliance deadline,” informed a senior GE Shipping official.

GE Shipping on a consolidated basis (which includes the offshore business) churned revenue of Rs 3,376 crore in FY18 but saw its cash flow from operating activities drop to Rs 979 crore as against Rs 1,521 crore in the corresponding period last year. Gross debt of the company, however was slightly lower at Rs 6,213 crore in the year under review from Rs 6,815 crore in the preceding year.

Highlights:

IMO has set global limit for sulphur in fuel oil at 0.50% m/m from 1 January 2020

Current global limit for sulphur content of ships’ fuel oil is 3.50% m/

IMO Ballast Water Management, ships have to comply with the standard between 8 September 2019 and 8 September 2024