URSABLOG: Market Research?

An interesting press release came to my attention the other day. I share it with you for your amusement and enlightenment:

Leading Japanese companies, NYK Line (NYK), NYK Bulk & Projects Carriers (NBP), TSUNEISHI SHIPBUILDING Co., Ltd. (“TSUNEISHI SHIPBUILDING”) and British renewable energy business, Drax Group (Drax), have signed a new memorandum of understanding (MoU) to develop both the world’s first biomass-fuelled ship (bioship) and the technology that could power it.

Biomass is playing a growing role in Japan’s transition from fossil fuel power generation to low carbon and renewable electricity, and the country’s demand for biomass pellets, sourced primarily from North America and composed of sawmill and forestry residues, is increasing.

Drax produces biomass pellets in both the US South and Canada. The company has a longstanding relationship with NBP which transports its pellets to Japan.

These pellets are currently shipped through smaller handysize bulkers, which, due to the limited size of their fuel tanks, have proved challenging to switch to lower emission fuels, such as ammonia. 

Through the MoU, which was signed at the British Embassy in Tokyo, the companies will initially conduct research to develop the new shipping technology, an on-board biomass fuel plant, which would be required to power a bioship. The four companies are exploring how other renewable technologies could be used to reduce both the emissions and fuel costs of shipping biomass.

The biomass fuel plant would use a gasifier to combust biomass at high temperatures and create and contain gases including carbon monoxide, hydrogen, and methane. These gases would then be used to power a generator which could propel the bioship and also provide a proportion of its internal power.

Really? Let me get this straight. Biomass – wood to you and I – is used to power Japan’s transition from fossil fuel power generation to low carbon and renewable electricity. But isn’t wood carbon? And aren’t fossil fuels carbon too? The only renewable part of this is that you can grow trees again to make more wood to burn. Admittedly the trees themselves absorb carbon dioxide to grow, so that it is a good thing, but wood, even as a byproduct or waste of something else, is still carbon. And it still produces carbon dioxide on burning.

As handysize bulk carriers are small, and not suitable for ammonia powered engines (as if any existed at the moment for ships of any size anywhere in the dry tramp market) they want instead to develop an on-board biomass fuel plant, to power the bioship. It would do so by using a gasifier to combust (burn) biomass at high temperatures to create gases to power a generator that could propel the bioship, and also provide a proportion of its internal power.

I am reliably informed (by Wikipedia) that a gasifier usually converts the biomass into gases at temperatures in excess of 700 °C (without combustion) to create syngas which is flammable. This is then burnt to create power. It’s renewability – even as it sends carbon dioxide (and other gases) into the atmosphere – comes only if the gasified compounds are sourced from renewable stock.

This technology has been around since the 1930s, and even powered road vehicles at the time when there was a shortage of petrol, particularly during the Spanish Civil War and the Second World War. Let’s just say the idea never really caught on. But my thoughts are focused instead of the following questions:

– How do you get the temperatures required to gasify the biofuel in excess of 700 °C onboard a handysize bulk carrier? Where does that energy come from?

– Are such high temperatures safe on board a ship carrying the fuel as a cargo? Where does the waste go?

– Is the biomass industry going to be so massive to justify the research and investment required to fuel a fleet of sophisticated and expensive ships which will have no use elsewhere?

I may be overly cynical about sincerely genuine efforts to find lower carbon solutions, but this is hardly going to make a dent in carbon emissions, especially as the fuel is carbon. Maybe by investing and researching this technology will produce other innovations that lead to better ideas, but I am not holding my breath. I shudder to think if I ever had to try and sell such a ship in the secondhand market. Thankfully, I really don’t think I ever will. It may work for electricity power generation, and I am by no means an expert but I think it’s a non-starter for shipping.

Elsewhere, research has been carried out by The Bartlett Energy Institute of UCL, and the Kühne Climate Centre in a paper titled Fossil fuel carrying ships and the risk of stranded assets. They set out to answer a number of questions:

1)  Who builds, finances, owns, flags, and operates fossil fuel carrying ships (fossil fuel carriers)?

2)  What is the current value and age structure of the fleet of fossil fuel carriers?

3)  What type and number of fossil fuel carriers will retire naturally until 2050?

4)  What will be the over-capacity of fossil fuel carriers in a 1.5°C scenario until 2050?

5)  What will be the volume of stranded assets in the form of book loss and lost profits under different shipbuilding scenarios: no new ships ordered as of 2024 versus continued newbuilding until 2030?

6)  What is the gap between existing and necessary ship recycling capacities, also considering the Hong Kong Convention?

7)  What segments of the fossil fuel carrying fleet can be repurposed for carrying other forms of energy or other commodities?

Many of the findings will not surprise many of you, but it is worth a read nonetheless.

The report understands the “considerable uncertainty surrounding future shipping demand” but nonetheless tries to model future shipping demand for fossil fuel carrying ships until 2050, using mostly data forecasts from 2018 which informed the Fourth IMO GHG Study. The projected demands have not, let’s say, aligned with reality. As the paper notes:

Due to the continued reliance on fossil fuels in the early 2020s, the transition has experienced a delay; consequently, staying withing the remaining carbon budget necessitates a more pronounced reduction in fossil fuel use to meet climate targets. Furthermore, the war in Ukraine has shifted part of the LNG transport from pipeline to ship, resulting in even greater shipping demand. Consequently, using the scenarios from the Fourth IMO GHG Study for the 2018-2050 period leads to a gap between observed reality and the scenario, and an overestimation of stranded assets during the initial years of our projections and an underestimation in the later years.

If at this point instead of looking at the observed shipping demand (from Clarksons SIN) from 2018-2023, they saw what the freight market was doing, they may have understood that the future, even in the short term is hard to model. They might also have understood that geopolitical (and other) events have an unnerving knack of spoiling the best laid plans.

The authors also seem to be very concerned about whether there will be enough Hong Kong Convention approved capacity to accommodate the expected ships needed to be recycled based on their age, and then conclude that there isn’t enough to accommodate ships if the large amount of stranded assets that they forecast will be surplus to use. This almost charming innocence of how the shipping world works reveals also a dangerous naivety.

Ships don’t get scrapped when they reach a certain age, or become obsolete. There is no regulation that insists that ships head to the scrap yards because they are environmentally unfriendly. The market decides: if it’s good, owners will invest in their ships to keep them going for longer, if it’s bad and they can’t see a time when they will make money on their continuing investment they will cut their losses and send them up the beach.

That said, it should be a concern that as we move towards 2050 the shift away from fossil fuels will lead to a decrease in demand for shipping. But crude oil is not only used to make fossil fuels; the petrochemical industry relies on it for many other products, from plastics to cosmetics, and much in between. And as many of us have noted, whilst the IEA’s 2050 net zero scenario is desirable, it’s also highly improbable.

So to argue that as much as US$ 280 billion in value could be destroyed in the next 25 years based on such rigid modelling – in turn based on outdated projections – undermines the whole research. Any familiarity with the large orderbook at shipyards, and the desire for newbuildings in general, and the pricing, should alert any researchers that all is not black and white.

This is what alarms me the most. The market – the charterers and operators, the freight rates, the orderbook, the money – is largely ignored by research. As any owner that trades in the tramp market knows, value can be created and destroyed by elements well beyond their control, including that most difficult one to measure: sentiment. It’s part of the game.

Demand for oil, and coal, and gas for that matter is one thing, the demand to move in varying amounts from one part of the world to another, is a different thing altogether. And even if fossil fuel demand does drop, and it seems likely that it will, there is enough money being made now – especially by tanker and gas carrier owners – to make sure that they can handle market turbulence in the future, bar the usual mistakes in timing, and exuberant animal spirits.

The shipping market does not see the world only through the prism of decarbonisation, and those promoting solutions to it, or trying to change investment behaviour would do better to remember that. What is the deciding factor at the end of the day? The market, and the market will decide.

Simon Ward