Fig. 2: Average annual Capesize time charter rates. Source: Clarksons Research & Baltic Exchange
BALANCING CARBON TAX AND HOCKEY STICK ECONOMICS The shipping industry is ready to decarbonize. The call for action signed by the leaders of the industry demonstrates just that. To scale up the necessary investment and accelerate decarbonization, besides technological breakthroughs, the shipping industry needs a clear pathway toward a level playing field. The incoming Energy Efficiency Existing Ship Index and Carbon Intensity Indicator regulations represent good progress but are insufficient to de-risk the long-term investment in green shipping assets. The lack of clarity in that regard produces continued uncertainty that, next to other macroeconomic and shipping market related factors, delay the necessary renewal of the dry bulk fleet at a time when its growth remains at a two-decade low.
The low growth of the late 1990s and early 2000s colliding with the insatiable demand for bulk commodities from the emerging Chinese economy produced a super cycle that sent the Capesize time charter rates to a 5-year average of $71,500 per day, as compared to about $20,000 average since 2018 (see Fig. 2). Of late, the world had a taste of the interaction of the prolonged low fleet growth with the post-Covid recovery that moved the rates from single digits, in January 2021, to about $70,000 per day in October 21’ and about $15,000 today (see Fig. 2).
To place these numbers in the context relevant for market-based measures, a freight disadvantage on Capesize iron trades from South America vs Australia to North Asia, resulting from an introduction of a $100 carbon tax, would equate to an increase in time charter rates by about USD 12,000 per day. If the dry bulk freight market were to experience the violent swings of 2021, the corresponding impact of charter rates on the cost of freight may be disproportionately greater than that following the introduction of a carbon tax.
THE PARADOX OF CARBON TAX Over the past 12 months, the dry bulk market has not been spared from the adverse effect due to the softening demand from China, inflation, and the looming recession. This apparent softening may be misleading for long-term fleet development. All recessions have one thing in common- they eventually come to an end, and this one will be no different. Ensuring the dynamics of the dry bulk fleet renewal are set in motion so that we do not run out of ships when the world economy recovers in a few years, is a must. And, a clear pathway toward pricing carbon will reduce the uncertainty that stands in the way of setting these dynamics in motion.
Time is not our friend, not only when it comes to the environment, but a just and equitable transition too. Failing to
act urgently on market-based measures now, may cost those who wish not to be affected by the shipping energy transition far more than the fear of the increased cost of ocean transportation due to a carbon tax. As President Roosevelt noted, “the only thing we have to fear is fear itself”. When we account for shipping economics, the paradox of a carbon tax is that time may prove that the only thing we should have feared, was the fear of its introduction itself.
Voytek Chelkowski is the Managing Partner at Seamind Blue Ocean, a change management consulting firm, and an Executive Coach at the International Institute for Management Development (IMD) in Lausanne, Switzerland.
14 | ADMISI - The Ghost In The Machine | Q3 Edition 2022
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