To Retrofit or to Scrap…? That is the Question

“How long can smaller, less well-known owners, especially ones with only one ship, continue to run their grand and less than grand old ladies?” Asked Chris Morgan, an industry credit expert, in a commentary piece for SVM Shipping SA.

To retrofit or to scrap? That is the question.

This is the decision that operators are increasingly faced with when looking to optimise their operations.

This week, we look at some of the factors that feed into this decision.

What is an ‘Old Ship’?

The factor to incorporate into the commercial decision of vessel retrofitting or purchasing is the concept that older tonnage is relative to the ship type: 1995 is old for a container ship; 1985 is positively geriatric for a bulker; 1975 for a livestock carrier or LNG tanker is not old at all; and an 1965 bunker barge is actually comparatively young.

The issue is made more problematic for owners by the fact that bunker companies are more cautious and more aware that the market is depending on scrapping to delay a potential downcycle. There are higher numbers of ships going to breakers than at any time in history as a result.

The Role of the Bunker Company

There have been disasters in the past whereby bunker companies have loaned the fuel capital for a vessel journey that they had funded many times before only to realise – upon the failure to receive further payment – that that journey had been straight to the scrap-yard.

It is therefore no longer possible for ship owners to maintain their fleet in operation until it is not at all feasible to safely continue to do so; bunker companies simply may not trust the operators of older ships enough to do business with them.

Even once bunker companies are aware of the problem of surprise scrapping, the decision-making process as to whether or not to supply a particular vessel is further complicated by the fact that there is no one easy criteria that bunker companies can use to identify ships that are at risk of being scrapped.

Operating older tonnage is not just less efficient because of the age of the vessel, but also because in some cases, owners have to pay cash for their bunkers where they may have credit for their newer vessels.

This is a distinct disincentive to retrofit the vessels rather than replacing the vessel outright.

Skepticism of Retrofitting

In addition, some industry leaders however are scathing of the entire retrofitting and eco-ship enterprise altogether. This seems like an untenable situation for any cost-driven – in other words, any and all company – to be in.

“Basically the eco-ship concept is really just a marketing ploy by the almost dead shipyards to try and get a short lease on life. In the dry bulk and tanker space there is no such thing as an eco-ship,” Khalid Hashim of Precious Shipping commented.

“What is the sell the yard trying to do? They say they are going to increase the diameter of the propellers so if the propeller moves at a slower speed, therefore burning less oil, it’ll give you same momentum.”

“With the bulbous bow no longer submerged due to the propeller’s increase in size, the net result would in fact be an increase in resistance.”

“You really have to be careful when you look at ecoships,” Per Wistoft, CEO of Brightoil Shipping Singapore also stated. “Ecoships are not really ecoships, it is a marketing tool by shipyards to sell the ship. A typical $100m tanker costs $450,000 a day in fuel.”

A Range of Retrofitting Options

Retrofitting to optimise operations and efficiency may well also be a way of convincing bunker companies of the operator’s ongoing commitment to the current vessel, and thereby assuage fears of what essentially amounts to fuel fraud.

The sheer number of commercially available solutions suggests that while bunker companies are cautious, retrofitting has indeed allowed the maritime sector to adapt current ships to the increasing pressures on the sector posed by volatile bunker fuel prices and regulatory demands for the industry to become more sustainable.

Quite simply, if retrofitting was not enough to convince the bunker companies and the vessel operators themselves of the ship’s renewed lease of life, the market would not exist. Rather than go down the scrap route, Maersk for example has positioned itself on the retrofit side of the fence with its USD $35 m retrofit programme across a number of its tankers.

In the view of Tommy Thomassen, vice president of technical organisation at the Maersk group subsidiary, it makes no sense to order new ships against current backdrop of substantial overcapacity and when existing vessels can be made significantly more efficient at a relatively low cost.

The Maersk programme will focus on small changes that cumulatively make an impact. For example, installing fuel saving devices such as Becker Mewis propeller ducts are expected to offer savings of between 6 to 8%. Before-and-after sea trials will verify the expected improvement of around 5 to 8 %, and the retrofit process itself will take two weeks.

Conclusion

While decision-making becomes increasingly complex for both operators and bunker companies as the industry responds to unprecedented challenges and opportunities, the sector’s attempts to enhance its eco-efficiency – and thus profitably, is one that should be encouraged by Bunker companies. Ironically, the less they refuse to do business with older vessels, the more older vessels will go to the scrapheap.

While some instances of fuel fraud are the unfortunate consequences of deceit, a certain element of the eco-ship/retro-fit debate will be determined by the self-fulfilling prophecies made by bunker companies.