Greek Business File, June-July-August 2020, No 126

Interview by Antonis Karamalegkos

 

A pragmatist by profession, Greek shipowner Dimitris Fafalios is certain that shipping companies will recover in a matter of days from Covid-19. Nevertheless, sectors such as passengers ships, ferries and cruise vessels will be negatively impacted

 

I cannot begin without addressing the coronavirus pandemic. I would want you to describe the impact of Covid-19 on your businesses.

 

Our experience lies in the dry bulk shipping business with vessels from Supramax (51,000dwt) to Kamsarmax (82,000dwt) which trade worldwide. Bulk and oil shipping transports 90% of vital commodities worldwide by deadweight. For these must-have cargoes, such as iron ore, coal, grains, bauxite etc., demand is governed by many factors other than Covid-19. Covid-19 has kept Chinese and Far Eastern shipyards closed or operating at low capacity. This has benefi cially affected the supply of ships available to the international markets, which should benefit freight rates but has only had a minimal impact. Covid-19 has also negatively impacted industrial output worldwide, which has kept demand for Cape-Sized tonnage low. Covid-19 arrived during Q1 2020, when shipping demand is annually and traditionally low. The most signifi cant impact of Covid-19 has been on our offi cers and crew! They are not allowed to sign off or sign on as in the pre-Covid period. This will cause major disruption from April onwards.

How has the coronavirus affected maritime shipping globally?

Some sectors, such as passenger ships, ferries and cruise vessels, will be directly and more negatively impacted by Covid-19 for obvious reasons. Other sectors are likely to suff er a lesser impact, as they are governed by supply and demand for basic commodities, some of which are aff ected by Covid-19.

Protection for seafarers and…

Which are the measures that a shipping company can take to minimize the impact of Covid-19?

Shipping companies must ensure the health and safety of their seafarers and shoreside personnel.

Primary protection for seafarers comes from the implementation of on-board procedures to deal with crew actions at sea and in port, interaction with landbased personnel, such as pilots, stevedores, authorities, suppliers etc. This must be controlled. The company must ensure that adequate protective clothing and equipment is supplied to the vessel along with suitable instructions for use. Cleaning products and medical supplies on board must be plentiful. The company has to abide by national and international restrictions for travel and quarantine of seafarers signing on and signing off the vessel. These restrictions are currently very onerous. Seafarers are obliged to stay longer on board. This requires their employment contract to be extended and all the major fl ags to have prepared Force Majeure provisions to aid both seafarers and ship operators. Relief crew must often be quarantined for at least 14 days and the method of confirmation of this quarantine is not universally accepted yet. All these processes must be successfully managed by the shipping company.

… shoreside staff

Regarding shoreside staff , the shipping company will be bound by local regulations and a working-from-home procedure must be introduced. Key personnel must be able to off er 24-hour response support for vessel and offi ce matters. Remote access to the offi ce server and teleconferencing between office managers are important and procedures must be set up. Some offi ces have developed a Team A and Team B approach so that only one team will physically be at the office at any given time.

The vessel itself is facing physical issues as Classification and statutory surveyors are often prevented from attending the ship by local regulations due to Covid-19. The company must work with the Class society and Flag of the vessel to extend any surveys on a Force Majeure basis. Whilst Class and Flag may provide pragmatic solutions to this problem, it is up to Port State Control to accept the interpretation of IMO SOLAS and MARPOL conventions by each Flag State in this extraordinary situation. Port State Control treatment of these issues is by no means uniform worldwide, which may cause operational problems for ships.

Once the coronavirus crisis comes to an end, how long do you believe that you will need in order to return to normal operations?

Recovery will be a matter of days Shipping is the management of change. Shipping companies manage situations which change daily or hourly! It will not take long for shipping companies themselves to recover from Covid-19. This will be a matter of days. The bulk/oil/chemical/LNG sectors will only have been lightly aff ected and will spring back quickly. The container, passenger, ferry and Ro-Ro sectors will take some time to reach their pre-Covid volumes, perhaps 2-3 months. The cruise sector will take the hardest blow, as it will have to regain the confi dence of its clients

For shipping sectors, timetables are different.

What are the next actions the marine industry should take globally against the pandemic?

Essentially, the industry must take all the above into account, it must learn from this tough Covid-19 experience and prepare itself at the ship management and equipment level, the shoreside management level, and the regulatory level.

IMO regulations and decisions

New IMO regulations have been effective from 1 January 2020. What is your opinion about the decision of the International Maritime Organization (IMO)?

IMO 2020 has brought both positives and negatives:

Positives

1) A reduction of SOx atmospheric emissions.

2) Ship owners and operators have shown their ability to adapt to the new Very Low Sulphur (VLSFO) fuels and supply situation in a very short time period. Despite dealing with matters beyond their immediate control, they have achieved a high degree of compliance through the development and application of shipboard and shore-side procedures. (ICS, Joint Industry Guidance, etc.)

3) The implementation of IMO 2020 has brought together three important groups with a view to closer co-operation, namely ship operators (through ICS, Intercargo, Intertanko, BIMCO), oil companies (OCIMF and IPIECA) and fuel suppliers (IBIA), together with other organisations, such as IMAREST etc. A Joint Industry Guidance Document was developed but, more importantly, it was encouraging that all these groups sat around the table for the fi rst time to try and iron out implementation issues brought about by IMO 2020.

4) Fuel oil quality and safety issues past, present and future were given much more attention by all parties due to IMO 2020.

5) Even at a late stage in the process, in 2018, IMO was persuaded to look at the ship and crew SAFETY aspect by connecting it’s MARPOL and SOLAS conventions. A necessary procedure that has not been followed many times before!

Negatives

1) A reduction of SOx atmospheric emissions according to an MIT study has shown that lower SOx particles in the atmosphere can adversely affect the earth’s ability to refl ect heat from the sun.

2) IMO directly regulates ship owners and operators only and not time charterers who are responsible for purchasing the fuel or oil refiners and fuel suppliers. This leads to an imperfect, non-uniform, implementation schedule with many problems.

3) IMO 2020 permits scrubbers to be used as an exception. Whilst the economic advantages of scrubbers for certain ship types are clear, a two-tier market has been created. Good regulations should not lead to two-tier markets! The environmental impact of effluent water from open-loop scrubbers is not yet clear.

4) IMO was persuaded to look at the ship and crew SAFETY aspect by connecting its MARPOL and SOLAS conventions barely one year before the 2020 Sulphur Cap came into force. This should have been started prior to the IMO Feasibility study being commissioned. Indeed, safety should have been one of the Study’s main Terms of Reference! There should be a mechanism for IMO’s MARPOL (Pollution) and SOLAS (Safety) organisations to be able to better coordinate at a very early stage in the rule making process.

Strong debate about scrubbers

There is a strong debate about the scrubbers that some companies have installed in their ships in order to comply with the new standards.

As I have mentioned above, IMO permitted scrubbers as an exception in the 2020 process. My personal interpretation is that scrubbers were originally intended for highly specialized ships, such as cruise vessels, passenger ships and ferries, which consume a significant amount of fuel both at sea and in port. These vessels are not usually engaged in the pure supply/demand markets faced by tankers, bulk carriers, container ships, gas carriers etc.

The economic advantages of scrubbers for certain ship types are clear. Large tankers, bulk carriers, gas carriers and container ships can benefi t from scrubber installation, as their fuel consumption is significant. The scrubber equation looks even better if a time charterer has offered to partly fi nance the cost of the scrubber as it is to their direct benefit. A large VLSFO/HSFO price diff erential leads to a short scrubber payback time.

The first two months of 2020 benefitted the owners and charterers of vessels fitted with scrubbers. Since then, the fuel price diff erential has dwindled due to good availability of VLSFO at certain key ports and the huge drop in fuel prices which resulted from the price war waged by the oil producers.

The Covid-19 pandemic severely affected the output of Chinese shipyards leading to severe delays in scrubber installation. Some vessels have been docked for more than eight weeks!

Scrubbers make little sense for vessels below around 85,000 DWT unless these vessels have special commercial arrangements where they can benefit. It should also be clear that a scrubber installation fitted to a new building ship allows a signifi cantly better overall result than retrofi tting a second-hand vessel.

Scrubber fitted vessels tend to sail faster and therefore produce more CO2. The question of open-loop scrubber effluent remains open with many countries and ports banning the use of open-loop units with HSFO.

Two-tier markets have developed for several shipping sectors and for the ship types I have mentioned above. Good regulations should not lead to two-tier markets!

Extra costs from new emissions regulations

As we are close to the end of the first quarter of 2020, have you noticed an impact of the new emissions regulations in your shipping company’s operating and financial results?

The extra costs related to 2020 compliance are many:

1) Voyage deviation to source compliant VLSFO.

2) Delays in receiving VLSFO initially, even in Singapore.

3) Significant costs for the removal of non-compliant HSFO remaining on board after 01.01.2020 and before the Carriage Ban on 01.03.2020 for vessels not fitted with scrubbers. Bunker tanks had to be cleaned after the HSFO removal with manpower and chemicals costs involved.

4) Extra costs relating to dealing with time charterers who did not understand their obligations under IMO 2020, i.e. they did not wish to accept the BIMCO 2020 clauses in the charter party.

5) Extra costs for fuel oil testing and chemical treatment. These were only borne by ship operators that did not have these procedures in place before Jan 2020!

6) Extra operating and maintenance costs for ships fi tted with scrubbers. These units were being operated for the first time on a daily basis starting on 01.01.20.

In general, then, the first quarter saw many extra costs for owners during the IMO 2020 transition period. Freight rates for many sectors such as dry bulk shipping were extremely depressed. Q1 2020 will be remembered as fi nancially challenging in many shipping sectors!