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How will the shipping market adapt to the next wave of regulations?

How will the shipping market adapt to the next wave of regulations | BDM Blog | BDM Law

As a specialist shipping law firm, we need to anticipate where problems will arise in the future so that we are able to support our clients when the need arises.

A few years ago, ship owners were scrapping ships at an alarming rate. That was good for the environment as older ships are replaced with newer, greener ships. The youngest vessel scrapped was the 4,250 TEU Hammonia Grenada which was just seven years old when scrapped in 2017. At that time, small container vessels were barely covering operation expenses. Now those same ships earn up to US$45,000 per day. There was a report recently that just four container ships were scrapped in 2021!

In the current hot market, ship owners are making the most of older tonnage with scrubber retrofits on older ships and/or a switch to low sulphur fuel oil to meet current regulations. When properly handled, older ships can make considerable profits.

That said, the next wave of regulation is coming from 1 January 2023. There are two main areas in the new MARPOL Chapter 4 Annex IV regulations.

The first is the Energy Efficiency Existing Ship Index, or EEXI for short. Regulations that currently apply to new vessels will be extended to all vessels from 1 January 2023. If the EEXI score is below the baseline requirement (the required EEXI), then ship owners will need to take measures to improve the ship’s EEXI score. Those measures can involve technical modifications, for example to make the propeller more efficient, or they could involve shaft power limitations (in effect slowing down or limiting performance). They may also involve technologies not yet fully developed. Class will need to approve the EEXI technical file at the first survey post-1 January 2023 and a certificate will be issued called the International Energy Efficiency Certificate (IEEC).

The second area is the Carbon Intensity Indicator (CII) framework, which will be extended to all vessels over 5000 gross tons. Each vessel will be given a rating from A (highest) to E (worst). Again, a comparison to baseline will take place – likely to be C in the first instance. Those vessels falling into D or E categories (currently comprising a huge number of operating vessels) must develop a plan to improve which has to be set out in something called the Ship Energy Efficiency Management Plan (SEEMP). Again, Class will need to approve the SEEMP and there will be pressure on ship operators to instal energy efficient technology or slow-steam or reduce cargo volume intake to achieve compliance.

The new regulations will cause problems for ship operators currently operating non-compliant vessels. In short, they are going to have to upgrade those vessels and the costs are presently unclear. Some operators are already looking to offload non-compliant vessels in the frothy S&P market. Others take the view that the short-term gains can off-set the medium to longer term costs associated with this tonnage and/or that they can deal with the impact in their contractual arrangements post 1 January 2023.

There is an underlying move by those who use ships (and who have adopted ESG as part of their business plans after the COP26 meeting) to use cleaner ships. Maersk have placed orders for eight 16000 TEU methanol powered container ships. NYK and others have followed with dual fuel ships. Hydrogen is also being promoted as an alternative source of cleaner fuel. Last year, the world’s first hydrogen-powered ferry, the MF Hydra, and the world’s first liquefied hydrogen carrier, the Suiso Frontier, were both delivered.

All in all, we are set for a year of interesting developments as we get closer to 1 January 2023. At the moment, we can only speculate on what is likely to happen. It seems clear, however, that ship owners and operators will require legal support as they have in the past when it comes to new regulations. There may be an uptick in S&P and scrapping which in itself is a highly regulated process requiring legal support. We are seeing and expect to see more clients building ships to replace older less environmentally friendly tonnage. Taking older ships out of the market will also keep freight rates high which will impact on many clients.

We are also bracing for what might happen after 1 January 2023. Who will bear the risk and responsibility for compliance with new regulations? Will it be the ship owners/operators or the charterers who use the vessels? How will owners and charterers deal with this issue when it comes to new period charters? If the only way to comply is to reduce speed and cargo volume then that directly impinges on the charterers’ use of the vessel and the rate of hire. Similar considerations apply for voyage charterers when it comes to the freight rates that can be achieved.

To sum up, increased regulation has a tendency to create legal issues and problems. We are gearing our team up to respond to these new issues as they arise so that we can best service our clients.

Nick Burgess - author profile
Nick Burgess
Partner
Constantin von Hirsch - author profile
Constantin von Hirsch
Trainee
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