Car Carriers Lead the Drive Towards Zero Emissions

Electric vehicle maker Tesla increased its market capitalization by an astonishing $500 billion in 2020. It is now more valuable than the world’s top eight automakers combined, owing to cutting edge lithium-ion battery technology and the visionary Elon Musk, who takes more risks than most. If only such equity returns were possible in the margin thin shipping business.

Last month, Stena Line took the bull by the horns in the ro/ro sector by announcing the world’s first fossil free fully battery powered ro/pax vessel of its size. At 200 meters in length, the lightweight Stena Elektra will have capacity for 1,000 passengers and 3,000 lane meters of freight, capable of 50 nautical miles on a single charge on the Gothenburg – Frederikshavn route. 

Stena is looking to add fuel cells, hydrogen, and biofuels to extend the power from 60-70 MWh in collaboration with Volvo Group, Scania and the Port of Gothenburg, which is a smart move. Regrettably, she will not be ordered for another four years, launching into service five years later in 2030. Rome wasn’t built in a day, but it feels slightly undercooked. 

DFDS responded soon after in more bullish tones, partnering up with ABB, Ballard Power Systems Europe, Hexagon Purus, Lloyds’s Register, KNUD E. HANSEN, Orsted and Danmarks Skibskredit to develop a ferry 100 percent powered by hydrogen, which could be fully operational by 2027 – if public money from the EU Innovation Fund is approved.

We finally have a race towards carbon neutrality in the ro/ro sector, which can only benefit the wider industry and bring more investors to the table. Sale and purchase activity was down prior to COVID-19, with a scarcity of second-hand buyers and new orders stalled as shipowners deliberate on green technology and best timing. Container operator Maersk, pledging carbon neutrality by 2050, will place its first zero emissions order within three years, deciding between ammonia, methanol, biodiesel and lignin fuel. That is a lot of fleet replacement. And if the EU commission makes good on carbon taxation to achieve climate targets by 2030, we could be looking at a major shake-up in the industry.

Premium for Zero Carbon Ships

Transparency is the name of the game in today’s consumer led supply chains. Manufacturers are acutely aware of environmental, social and governance (ESG) standards, using tech such as blockchain for immutability and accountability of supply. Global forwarders advertise online carbon calculators for sales and emissions clarity, enabling exporters to see the carbon footprint per unit of cargo quoted. DSV is currently working on a digital platform that will enable customers to choose more climate friendly routes and pay extra for green fuel. 

Carriers, as transport suppliers to both manufacturers and forwarders, must accurately report on CO2 emissions per freight unit to secure long term contract business. Fairly soon the end consumer will expect zero carbon transportation from end to end in the supply chain, on cost parity over land and sea. There lies the drawback for shipowners.

So, what will happen to ro/ro asset values as we transition to green? It depends on the cargo mix, respective markets, and the type of ro/ro. In the mid-term, we expect to see a divergence in charter rates with stronger relative demand for LNG powered tonnage and battery hybrids. PCTC, ro/ro, ro/pax and con/ro shipowners already priced-in to LNG - such as Siem, UECC, NYK, K-Line, Stena Ro/ro, WALLENIUS-SOL, Bore, Tallink Grupp, Matson, Crowley and Seaspan - are in a favorable position to capitalize over non-green assets. Grimaldi’s green battery-in-port hybrids are a clever compromise and values should hold up relatively well, especially if the battery technology develops. 

NYK recently announced they plan to replace its existing PCTC fleet with 40 newly built LNG-fueled vessels over the next decade, reducing CO2 emissions by 50 percent per ton-mile by 2050. However, these plans could be revised if the EU toughens its policy on emissions pushing through a regional carbon levy as a logical next step. Biden is likely to support it.

A Blueprint from Norway

Latest global predictions from auto analysts suggest 20 percent of all new car sales will be electric by 2030, rising to 58 percent by 2040. These are big numbers, and perhaps conservative for Europe noting more than half of Norway’s total was electric in 2020, with many arriving on PCTCs from Tesla’s Gigafactory in Shanghai (although outsold by Volkswagen). Norway has the highest number of electrical ferries in the world where pioneer Norled is now building a hydrogen driven ferry. The car market transformed due to generous government tax incentives, excellent stakeholder collaboration, and strong consumer demand for electric vehicles.

GM (General Motors) referenced Norway’s success in their Super Bowl commercial last month employing Will Ferrell to great comedic effect. GM are launching 30 new global electric vehicles by 2025, aiming to be completely electric by 2035. With such development, investment, and demand – it is plausible to imagine a scenario next decade where a leading car manufacturer will insist their sophisticated electric tech vehicles are shipped on zero carbon vessels, paying a premium for the service, bringing value back to shipowners and shareholders invested.

Values as we Transition to Green

Based on the high proportion of valuable cars on LCTC/PCTC/PCC vessels, vehicle carriers will be the first type to go “green.” They will be closely followed by ropax ferries trading on shorter city to city journeys, where passenger income is the driver of earnings. Pure cargo ro/ro vessels will enjoy the longest period of grace due to a more diverse cargo mix. The impact to vessel values as non-green assets compete head on with green assets in respective markets is the big unknown. Shipowners report an increasing difficulty in selling small, vintage tonnage, particularly in Europe. The net must be cast wider on a global level.

Investing in bridging fuels versus carbon neutral solutions continues to divide shipowners. However, we are beginning to see carriers take clearer positions with electric, biofuels and hydrogen emerging as front runners in the ro/ro sector. Dual-fuel LNG engines equipped with battery packs, which also have the flexibility to run on fossil free liquid or gas are a safe bet. 

Dan Nash is the Head of Ro/Ro at VesselsValue. This post appears courtesy of VesselsValue and is reproduced here in an abbreviated form; the original may be found here.