To scrub or not to scrub? It was the decision facing management of New York-listed Eagle Bulk Shipping in 2018 ahead of the IMO 2020 sulphur cap protocols, and the choice was different from nearly all its competitors in the midsize bulker segment.
Eagle Bulk decided to install the exhaust-gas cleaning devices rather than use 0.5% low-sulphur fuel going forward: 47 ships and $100m later, the Connecticut-based owner had scrubbers on 89% of its fleet of supramaxes and ultramaxes.
Scrubber adoption for the rest of the world fleet in those sizes: only 8%.
Three years later, Eagle Bulk can look back with some satisfaction on its choices.
Full payback in 2022
With $60m of fuel savings back in its coffers and spreads between high-sulphur and low-sulphur fuels again on the rise, Eagle Bulk believes it can recoup its total outlay before 2022 is over.
Eagle Bulk chief executive Gary Vogel and chief strategy officer Costa Tsoutsoplides spoke about the scrubber economics in a recent interview with TradeWinds on the sidelines of Noble Capital’s NobleCon investor conference outside of Fort Lauderdale, Florida.
“We’re very happy with where we are, especially given the challenges of 2020 with Covid-19 and lower fuel spreads,” Vogel said.
“We’re extremely satisfied with the return on investment, and the efficacy of the scrubbers themselves has been far beyond expectations.”
Eagle Bulk’s strategic choice for the cleaning devices takes a bit of explaining.
Few in the rest of the market followed suit because they calculated that the devices would be relatively uneconomic: they would provide better returns on larger capesize bulkers that spend more time burning high-sulphur fuel at sea away from restricted economic zones.
But the Eagle Bulk team expected this reaction.
“We didn’t know what the number [of adopters] would be, and it would have been higher if not for Covid, but we felt it would be low,” Vogel said. “Simply put, the economics aren’t as compelling as on larger ships given lower fuel consumption.”
But that meant that the market would set rates reflecting use of the pricier cleaner fuel.
Eagle Bulk would quote its own rates on the same basis, but then reap the spread between the two.
That differential turned out to be volatile, especially when Covid-19 threw a wrench into things.
From a spread of $300 per tonne in early 2020, the number dropped as low as $50 later in the year and averaged $100 for all of 2020. A collapse in underlying fuel prices, as well as a lack of demand for jet fuel, made low-sulphur bunkers relatively more affordable.
Helped by a hedge
But Eagle Bulk had hedged about half of its exposure, allowing it to secure a spread of about $150 per tonne for the year.
Then larger spreads came back in 2021 and have continued as high as $250 per tonne in 2022. A current gap of about $190 per tonne means a $2,600 per day premium for each Eagle Bulk vessel and about $45m per year fleet-wide in Ebitda benefit, Tsoutsoplides said.
The spread is likely to widen again through the year amid rising oil prices and rebounding demand for jet travel.
Vogel told TradeWinds that he preferred to avoid rekindling the often-acrimonious debate that emerged ahead of IMO 2020 apart from the economics of scrubbers, with critics claiming that shipowners were simply pulling sulphur out of the air and pouring it into the water.
But he did say Eagle Bulk’s scrubbers were performing well beyond expectations, with some even cleaning to a level of 0.1% sulphur rather than the mandated 0.5%.
“There were a few what I would call teething pains initially, but apart from that their reliability has been outstanding,” Vogel said, directing praise at manufacturer CR Ocean of New Jersey, which provided all the equipment.
While there will no doubt continue to be controversy over the use of scrubbers, some studies have provided evidence in their favour since IMO 2020 was implemented.
For example, a paper published by the Elsevier journal Transportation Research suggests the switch from high-sulphur fuel oil (HSFO) to very low-sulphur fuel oil (VLSFO) may have increased global carbon output by 323m tonnes per year — almost one-third of shipping’s carbon footprint — because of increased refinery emissions from the cleansing process.
This and other studies have posited that using HSFO with a scrubber results in a lower “well to wake” carbon footprint than using VLSFO.
