Viewpoint: IMO regs to further stretch tanker fleet

Supply tightness in the global tanker market will likely be exacerbated in 2023 as new environmental regulations incentivize slow steaming and increased demolitions of older, less-efficient vessels by shipowners.

The International Maritime Organization (IMO) will implement two new regulations on 1 January 2023, the Carbon Intensity Indication (CII) and the Energy Efficiency Existing Ship Index (EEXI). Both regulations will require shipowners to measure the emissions efficiency of their vessels, with the CII measuring a vessel's actual emissions on a yearly basis and grading the vessel between A (best) and E (worst); and the EEXI measuring a vessel's theoretical emissions based entirely on the vessel's design and specifications, not how it actually operates.

Market participants have questioned the efficacy of the regulations, particularly the CII, with many saying the regulation will lead to higher maritime carbon emissions because shipowners will be able to achieve better grades for their less-efficient vessels by using them for longer voyages, while modern, "eco vessels" will be able to easily achieve a compliant grade (C or better) when trading short-haul shipments.

Slow steaming, scrapping, secondhand sales

But whether or not the regulations are effective in reducing carbon emissions, they will lead to moves that will put upward pressure to tanker rates.

More shipowners will permanently "slow steam" their vessels in order to achieve a compliant CII grade because when a vessel sails slower it emits less carbon. This will effectively tighten the global tanker fleet because ships will spend more time in transit and less time available to load cargoes.

Shipowners can also retrofit existing vessels with new engines or other energy-savings devices in order to comply with regulations, but this might not be economical for some vessels near the end of their life spans. Because of this, the new regulations will likely accelerate the demolition of older vessels, which will further tighten the global tanker fleet.

Alternatively, many larger, commercial shipowners have been offloading their older vessels on the secondhand market rather than scrapping them. Resale activity for tankers older than 15 years has been plentiful this year because of strong demand from smaller, more opaque owners who many expect will use the vessels as part of the "shadow fleet" to move sanctioned Russian barrels. This is another factor that will limit tonnage supply for commercial trades, as vessels involved in sanctioned trades are unlikely to be acceptable to the spot market because of legal or insurance reasons.

Fleet tightness to persist through 2024

The new IMO regulations come amid elevated freight rates, with current earnings in excess of $50,000/d across most crude and refined product tanker markets. The high rates have been driven by shifting flows caused by the Russia-Ukraine conflict along with continued export demand recovery from the Covid-19 pandemic, both of which have stretched the global fleet.

And little relief will come from newbuild deliveries, as the clean tanker fleet is forecast to grow by just 0.9pc next year, down from 1pc this year, while the crude tanker fleet is forecast to grow by 1.7pc, down from 5.4pc this year, according to Bimco.

This dearth of tanker deliveries will extend into at least 2025, as shipyard capacity is nearly entirely filled by orders for containerships and LNG tankers through the end of 2024.

"Even if we wanted to ruin the market — even if all of us here were to say, ‘let's go out and order 150 product tankers' — you can't do it," Hafnia Tankers chief executive Mikael Skov said at a conference in June. "So that may be one of the most important parts of the market having legs."

By Michael Connolly