WEBVTT - IMO 2020: Holiday Gift Guide, No SOx 0:00:08.520 --> 0:00:11.560 Hey, DNA, Mark, are you looking forward to the new year? 0:00:11.760 --> 0:00:13.480 I try not to think about it is the new 0:00:13.560 --> 0:00:16.400 year as much as my birthday because New Year's Eve 0:00:16.480 --> 0:00:19.920 is my birthday. Yeah, I did know that, but this 0:00:20.000 --> 0:00:22.840 is also the turn of the new decades? So which 0:00:22.880 --> 0:00:26.480 is better your birthday or the turn of the decade. Well, 0:00:26.600 --> 0:00:29.160 I'm going to be on my way back to London 0:00:29.600 --> 0:00:32.159 on my birthday, which means I won't be celebrating New 0:00:32.240 --> 0:00:35.080 Year's Eve. But my mother used to tell me when 0:00:35.080 --> 0:00:36.680 I was a kid, all the fireworks for for me. 0:00:36.840 --> 0:00:39.400 So if we continue to operate under that premise, maybe 0:00:39.440 --> 0:00:42.760 it's a draw. Okay, fine, that works. What are you 0:00:42.880 --> 0:00:45.600 looking forward to about the change of the decade in 0:00:45.640 --> 0:00:48.159 the new year. Well, clearly it's going to be I 0:00:48.320 --> 0:00:51.720 m O when new regulations come into force for the 0:00:51.720 --> 0:00:55.840 global shipping industry. Clearly joining us today in the studio 0:00:56.000 --> 0:00:59.480 is Richard Chatterton, who is our lead oil analysts, and 0:00:59.600 --> 0:01:03.160 Richard's actually based out of our Singapore office. Mark and 0:01:03.200 --> 0:01:06.600 I had a business trip to Singapore last year around 0:01:07.040 --> 0:01:09.360 the New Year. And Mark, what do you remember most 0:01:09.440 --> 0:01:14.600 about Singapore chili crab? Yeah, it was really tasty. Apparently 0:01:14.640 --> 0:01:17.240 it doesn't come from Singapore though, Um, I don't know. 0:01:17.280 --> 0:01:19.400 Maybe maybe a thin from Singapore. They can correct me 0:01:19.440 --> 0:01:22.959 on that, but yeah, tall buildings, I don't know. In 0:01:22.959 --> 0:01:26.600 the Merlin, don't forget the half Mermaid, half Lion. Well, 0:01:26.600 --> 0:01:29.880 the thing I remember most of all about Singapore is 0:01:29.920 --> 0:01:32.360 when you look outside the window and you're flying in, 0:01:32.920 --> 0:01:36.000 you see ships in that bay. More ships and maybe 0:01:36.080 --> 0:01:38.399 I've ever seen anywhere, and I actually grew up in 0:01:38.400 --> 0:01:40.520 northern California. I've seen quite a few ships in San 0:01:40.520 --> 0:01:44.880 Francisco Bay. But Singapore, You've got more ships in one 0:01:44.920 --> 0:01:48.000 bay than I even thought was possible. So it is 0:01:48.080 --> 0:01:50.760 perfect that we have Richard Chatterin joining us today to 0:01:50.880 --> 0:01:56.080 talk about shipping. UH and I am ow we actually 0:01:56.120 --> 0:01:59.960 write a monthly report about im. If you would like 0:02:00.160 --> 0:02:02.160 to read it, you can find it on the Bloomberg 0:02:02.240 --> 0:02:05.760 terminal at b NF, go on bn F dot com, 0:02:05.880 --> 0:02:08.640 or on the b NF mobile app. And if you're 0:02:08.639 --> 0:02:11.240 already turning this podcast off thinking it's about shipping it's 0:02:11.240 --> 0:02:13.680 not for me, well you'll find out pretty quickly that 0:02:13.720 --> 0:02:17.359 this really applies to pretty much every sector. So have 0:02:17.360 --> 0:02:20.239 a listen, stay tuned, and UH, let's jump in with Richard. 0:02:20.480 --> 0:02:23.959 As a reminder, biennyf does not provide investment or strategy advice, 0:02:24.000 --> 0:02:25.600 and you can hear a full disclaimer at the end 0:02:25.600 --> 0:02:31.160 of the show. Now let's jump in with Richard. Hi, 0:02:31.240 --> 0:02:33.120 rich thank you for joining us today. Thank you for 0:02:33.160 --> 0:02:37.320 having me. I am O is a phrase that I 0:02:37.360 --> 0:02:40.960 was not familiar with until this year, but is pretty 0:02:41.040 --> 0:02:43.720 much well anybody can talk about in the shipping industry 0:02:43.720 --> 0:02:47.280 at the moment. Can you please tell us what it is? Well? 0:02:47.320 --> 0:02:49.240 Being an oil analyst, it's pretty much the only thing 0:02:49.240 --> 0:02:53.160 that I've worked on for the past twelve months. Um, 0:02:53.200 --> 0:02:57.840 i'm is the most important regulatory changed to impacts or 0:02:57.880 --> 0:03:03.359 reported markets for decades. It's is creating significant disruption and 0:03:03.840 --> 0:03:06.600 complications for the shipping industry, but it's also a big 0:03:06.600 --> 0:03:10.240 deal for the refining sector. So from the first of 0:03:10.320 --> 0:03:17.359 Jan the sulfur fuel content specification as regulated by the 0:03:17.400 --> 0:03:20.960 International Maritime Organization will fall from three point five per 0:03:21.000 --> 0:03:24.560 cent SUL for contents to zero point content. Now, that 0:03:24.680 --> 0:03:27.639 is a really really big shift to put into context. 0:03:28.280 --> 0:03:31.400 Sulfur has been regulated out of pretty much every other 0:03:31.600 --> 0:03:35.120 sector where oil is used. Why because it's a very 0:03:35.200 --> 0:03:40.800 undesirable pollutant that causes localized devolution in an urban setting. 0:03:41.200 --> 0:03:44.320 If you look at the regulations which which have come 0:03:44.320 --> 0:03:47.520 into force over the past decades to to to reduce 0:03:47.600 --> 0:03:52.960 the sulfur content of road fuels, which were quite significant. 0:03:53.240 --> 0:03:55.400 Um if we go back to the seventies, eighties and 0:03:55.840 --> 0:04:00.200 early nineties, they were causing acid rain. It's it's it's 0:04:00.240 --> 0:04:04.000 really something that's undesirable. So regulators acted to to to 0:04:04.120 --> 0:04:07.000 push down the sulfur content of of road fuels and 0:04:07.040 --> 0:04:10.000 other phosphors which are used in built up areas. What 0:04:10.120 --> 0:04:14.520 this then resulted in Thore is that refiners are faced 0:04:14.560 --> 0:04:16.440 with the problem when you when you look at what's 0:04:16.440 --> 0:04:19.480 in a barrel of oil hydrocarbons, and there's impurity. Is 0:04:19.520 --> 0:04:22.600 one of the key impurities of sulfur um. If you 0:04:22.640 --> 0:04:27.320 push sulfur out of the u of the of the barrel, 0:04:27.839 --> 0:04:31.920 across across diesel, across gasoline, across kerosene um, it ends 0:04:31.960 --> 0:04:34.800 up in the bottom of the barrel, the residual, so 0:04:34.880 --> 0:04:39.159 to speak, which is the main source of supply for 0:04:39.200 --> 0:04:42.080 the for the bunker market for shipping fuels. So what 0:04:42.120 --> 0:04:45.560 you've ended up with is this concentration of sulfur emissions 0:04:46.000 --> 0:04:51.719 from oil essentially accumulating in shipping fuel. Interesting statistic is 0:04:51.720 --> 0:04:54.320 the fifteen of the largest ships actually admit more sulfur 0:04:54.360 --> 0:04:56.799 than all of the world's cars now because the regulation 0:04:56.839 --> 0:05:00.240 around road fuels is so stringent and the and the 0:05:00.279 --> 0:05:05.240 absence of regulation for shipping fuels means that suff emissions 0:05:05.279 --> 0:05:07.720 in the in the ship industry un constraint. So this 0:05:07.800 --> 0:05:09.960 is the first time, from the first chance with the 0:05:09.960 --> 0:05:13.400 first time that sulfur content will be regulated to a 0:05:13.440 --> 0:05:17.560 meaningful degree, and that is causing causing some big challenges. 0:05:17.720 --> 0:05:19.920 But it's been a step change coming for some time, 0:05:19.960 --> 0:05:24.680 hasn't it. It has, but this is the first time 0:05:24.720 --> 0:05:27.040 that it is creating a pain point. This is the 0:05:27.080 --> 0:05:31.280 first time that shipping companies are having to install equipment 0:05:31.520 --> 0:05:34.880 to to comply with with more stringent regulations, and it's 0:05:34.880 --> 0:05:36.720 the first time that the refining system is having to 0:05:36.800 --> 0:05:42.279 significantly reconfigure and having to significantly react to a new standard, 0:05:42.320 --> 0:05:48.440 which which will require a wholesale re engineering of the 0:05:48.480 --> 0:05:53.400 marine fuel supply infrastructure. Um So there are different ways 0:05:53.400 --> 0:05:55.440 that you can comply. From the beginning of the year, 0:05:56.080 --> 0:05:58.919 you can either just buy low sulfur fuels, but you 0:05:58.920 --> 0:06:01.239 can also install a few if you're a vessel operator, 0:06:01.360 --> 0:06:04.039 instead of buying low so for fuel, which may be 0:06:04.080 --> 0:06:06.360 more expensive, you can install a piece of kit on 0:06:06.400 --> 0:06:10.839 your ship to scrub the sulfur emissions from the flu gasses. 0:06:11.720 --> 0:06:14.760 These are these exhaust gas cleaning systems or scrubbers for shorts, 0:06:15.440 --> 0:06:18.200 which costs money. Like maybe it can be it can 0:06:18.240 --> 0:06:21.880 be several million dollars to install one of these things, 0:06:22.279 --> 0:06:25.840 and the challenges that there are only a few companies 0:06:26.440 --> 0:06:31.480 that have the capacity to to install scrubbers. These scrubbers 0:06:31.480 --> 0:06:34.480 have been pretty common placed in the power sector for 0:06:34.560 --> 0:06:37.760 some years now. Are the same companies that installed them? 0:06:37.839 --> 0:06:40.719 There are the same ones that install them on chips um. 0:06:40.760 --> 0:06:42.600 It's a good question. I think that a lot of 0:06:42.640 --> 0:06:45.760 the technology is the same, but the main companies are 0:06:45.839 --> 0:06:49.120 marine technology companies or mean engineering companies, your Apple vowls, 0:06:49.160 --> 0:06:52.640 your what Sillers, your Yarra marine. But there's no doubt 0:06:52.720 --> 0:06:55.279 that they also in a sell into the supply chain 0:06:55.320 --> 0:07:00.400 that that provides similar equipment of stationary stationary application. So 0:07:00.760 --> 0:07:02.800 if I'm a stationary provider, should I see this as 0:07:02.800 --> 0:07:05.320 an opportunity? Well, a lot of people saw this as 0:07:05.320 --> 0:07:10.680 an opportunity for UM, the for the marine engineering companies. 0:07:10.920 --> 0:07:12.600 And we did see sort of in the run up 0:07:12.600 --> 0:07:15.200 to IM or in the run up to the discussions 0:07:16.000 --> 0:07:20.440 maybe last year and early part of you saw significant 0:07:20.480 --> 0:07:23.120 increases in the share prices of some of these companies. 0:07:23.160 --> 0:07:26.480 But the expectations for scrub adoption have actually fallen off 0:07:26.520 --> 0:07:28.800 some what and I'll tell you why. What what you've 0:07:28.800 --> 0:07:30.880 had is is this sort of face off between the 0:07:30.920 --> 0:07:35.280 refining system and the shipping industry as to who acts first. 0:07:35.360 --> 0:07:37.760 It's kind of a bit of a first movie disadvantage, right, 0:07:37.760 --> 0:07:41.000 if you're absolutely if you if if you're if you're 0:07:41.000 --> 0:07:44.640 one of the big vessel operators or shipping companies, if 0:07:44.640 --> 0:07:47.200 you install scrubbers on all your vessels in the expectation 0:07:47.320 --> 0:07:50.840 that UM, you're gonna you're gonna make more money by 0:07:50.880 --> 0:07:54.160 complying that way, I should probably explain the rationale to 0:07:54.240 --> 0:07:57.960 install a scrub on your vessel is because you would 0:07:58.000 --> 0:08:00.320 assume that the high soul for fuel which you will 0:08:00.360 --> 0:08:02.920 then be able to continue burning. Because remember you're scrubbing 0:08:02.960 --> 0:08:06.440 the solfa on your ship. You're so you're still in compliance. 0:08:06.480 --> 0:08:09.000 You're reducing your sulf emissions, but you can still buy 0:08:09.040 --> 0:08:12.520 the high sulfur fuel, which should trade at a discount 0:08:12.560 --> 0:08:15.040 to the compliant fuel which has had to go through 0:08:15.560 --> 0:08:19.800 more extensive refining processes. Um, the gamble that you're making 0:08:19.840 --> 0:08:22.800 is that the multimillion dollar investments to restore the scrubb 0:08:22.840 --> 0:08:25.600 but will be paid off over time by the lower 0:08:25.600 --> 0:08:29.400 fuel costs. All right, So you you're essentially taking a 0:08:29.440 --> 0:08:33.000 bet on the outlook for fuel prices. However, if the 0:08:33.240 --> 0:08:37.600 refining system does one of two things, if they increase 0:08:37.679 --> 0:08:41.720 the supply of compliant fuel to such an extent that 0:08:41.760 --> 0:08:44.199 there isn't really a price spread between high sulf and 0:08:44.240 --> 0:08:46.760 low suff for fuels, then it might not be worth 0:08:46.760 --> 0:08:48.600 it all the scrubbers. But then, on the other hand, 0:08:48.960 --> 0:08:51.480 it just might not be possible to buy high sulfur 0:08:51.520 --> 0:08:53.320 fuel over a period of time. If you think about it. 0:08:53.360 --> 0:08:55.760 You know, in the revual sector, was the last time 0:08:55.760 --> 0:08:59.160 you ever saw leaded petrol for so it gets regulated 0:08:59.200 --> 0:09:01.760 out of the market. Suppliers will you know, will will 0:09:01.800 --> 0:09:06.520 will respond if the market diminishes to certain extent, and 0:09:06.559 --> 0:09:09.719 if they have infrastructure constraints or they only have one 0:09:09.800 --> 0:09:12.240 barge that they can use to rebunk of vessels in 0:09:12.280 --> 0:09:15.480 a particular location. They might just not offer high sulfur 0:09:15.760 --> 0:09:18.160 fuel oil in a particular place, which means it doesn't 0:09:18.160 --> 0:09:19.520 matter if you have your scrubble or not, you're still 0:09:19.520 --> 0:09:21.439 gonna have to pay for the for the compliant fuel. 0:09:21.800 --> 0:09:26.079 So as a result, you've had a kind of very 0:09:26.120 --> 0:09:30.280 slow decision making process from the shipping industry as to 0:09:30.600 --> 0:09:34.200 how many scrubbers were going to install, and we've got 0:09:34.200 --> 0:09:36.880 closer from collection close to the deadline. Earlier this year, 0:09:36.920 --> 0:09:38.920 there were some big estimates that were put out there 0:09:38.920 --> 0:09:42.600 by by other by other analysts, five six thousand scrubbers 0:09:42.640 --> 0:09:45.640 by numbers always been around about three three and a 0:09:45.640 --> 0:09:47.080 half thousands. We think by the end of the year 0:09:47.080 --> 0:09:49.000 of the number will be about three thousands. So that 0:09:49.040 --> 0:09:53.040 means about one in ten large ships will have one intent. 0:09:53.360 --> 0:09:56.400 Ships not the largest ships will one intent. Of the 0:09:56.400 --> 0:09:59.320 marine fleet will have have a scrubber installed. That means 0:09:59.360 --> 0:10:01.600 that there's the st equilibrium that we've got to write 0:10:01.600 --> 0:10:04.960 where companies are sort of hedging their bets. They're installing 0:10:05.000 --> 0:10:07.520 a few scrubbers here, and they're they're gonna they're gonna 0:10:07.600 --> 0:10:09.959 they're gonna buy compliant fuel for the rest of their fleet, 0:10:10.280 --> 0:10:12.880 and what they're um, well, they're What they're essentially going 0:10:12.920 --> 0:10:14.400 to do is wait and see see what happens to 0:10:14.440 --> 0:10:16.720 the price breads. So if you're a Lavello, what Silla 0:10:16.800 --> 0:10:18.920 and you were making, people were making big bets on 0:10:18.960 --> 0:10:20.640 the number of scrubbers that you were going to sell 0:10:20.960 --> 0:10:25.120 over this period of time, you're you've probably been disappointed 0:10:25.120 --> 0:10:27.080 by how this has turned out. But the scrubbers do 0:10:27.120 --> 0:10:30.200 have some advantages, don't they In terms of timelines for 0:10:30.280 --> 0:10:36.160 the actual ships. Scribbers have a number of disadvantages. I 0:10:36.160 --> 0:10:39.720 would say they probably, I think, I think in terms 0:10:39.760 --> 0:10:46.479 of in terms of operational um in terms of operational flexibility, 0:10:47.040 --> 0:10:52.840 scrubbers provide ships with less risks in terms of bunkering operations. 0:10:52.880 --> 0:10:57.480 Because you could argue that in certain places from January one, 0:10:57.480 --> 0:11:00.480 it won't be possible to get a hold of piint fuel. 0:11:00.520 --> 0:11:02.160 We can go into this amite, but I actually don't 0:11:02.160 --> 0:11:03.720 think that's going to be the case. In most major 0:11:03.720 --> 0:11:05.760 bring reports that is going to be availability. But if 0:11:05.760 --> 0:11:07.560 you were worried about that, you could say it installing 0:11:07.559 --> 0:11:10.120 the scrubber means it's less likely that I'll have any 0:11:10.200 --> 0:11:13.040 issues with getting hold of the pliant fuel. But the 0:11:13.160 --> 0:11:17.200 downside is there are operational challenges with having scrub on board. 0:11:17.200 --> 0:11:20.320 It's a complex piece of kit which usually need to have. 0:11:20.480 --> 0:11:23.120 You need to have a certain degree of expertise and 0:11:23.520 --> 0:11:26.400 training for the crew to operate. There are inputs that 0:11:26.440 --> 0:11:28.640 you need to You need to you need to feed 0:11:28.720 --> 0:11:31.800 these things with with re agents, with soda ash lime. 0:11:32.920 --> 0:11:36.000 You also have an issue with wash water and this 0:11:36.040 --> 0:11:37.880 is going to become a bigger issue I think over 0:11:37.920 --> 0:11:40.240 the coming years. There are two types of well, the 0:11:40.280 --> 0:11:42.440 three types of scrubber. There's an open loop scrubber, there's 0:11:42.440 --> 0:11:45.599 a close loop scrubber, and there's a hybrid scrubber. The 0:11:46.320 --> 0:11:49.360 names sort of sort of our self explanatory and openly scruber, 0:11:49.360 --> 0:11:52.240 but it does as it pushes water in through an 0:11:52.240 --> 0:11:57.640 inflow through the flu gasses, dissolves the sult of content 0:11:57.720 --> 0:12:01.200 in the in the exhaust gases, and then it just 0:12:01.400 --> 0:12:04.000 chucks the water out into the sea. A closed loop 0:12:04.040 --> 0:12:06.640 scrubber it's the same process, but you have as a 0:12:06.679 --> 0:12:09.640 self contained closed loop where you have storage tank on 0:12:09.679 --> 0:12:14.319 board and there is no there is no discharge and 0:12:14.360 --> 0:12:16.680 the hybrid allows you to switch between the two. Difficult 0:12:16.679 --> 0:12:18.520 thing about having closed scruber is that aim more expensive 0:12:18.520 --> 0:12:20.079 and be the second more space on the vessel. The 0:12:20.080 --> 0:12:22.080 problem with an open loop scrubber is that it's not 0:12:22.200 --> 0:12:25.520 very nice. It sounds like there's any scrubber eventually, Rightly, 0:12:25.600 --> 0:12:28.760 what you actually want to push towards is compliant fuel, 0:12:28.840 --> 0:12:32.120 right absolutely. I mean, if you're an environmental advocate, well, 0:12:32.160 --> 0:12:34.400 I think I think in terms of the way that 0:12:34.800 --> 0:12:36.800 the regulation has been structured, it's it's been a bit 0:12:36.800 --> 0:12:40.200 of a compromise, because that in prinsible, it should just 0:12:40.240 --> 0:12:44.559 be we're moving to a lower um sour fur specification 0:12:45.200 --> 0:12:49.520 for fuels, let's let's get it done. But the argument 0:12:49.640 --> 0:12:52.480 was we have to give the industry a pathway to adapt, 0:12:52.600 --> 0:12:55.880 a pathway to be able to to to transition to 0:12:56.040 --> 0:12:59.360 that lower spec over time, and scrubbers allow you to 0:12:59.360 --> 0:13:03.200 do that. I think that in terms of the impact 0:13:03.240 --> 0:13:05.240 of our mo we don't want to we don't focus 0:13:05.360 --> 0:13:08.240 too much on scrubbers because they are they are kind 0:13:08.240 --> 0:13:12.080 of a only only only only part of the equation. 0:13:12.360 --> 0:13:15.360 What you have with the economics of scrubbers is really 0:13:15.400 --> 0:13:19.840 a temporary trend. One of these things, like I said, 0:13:19.880 --> 0:13:22.160 costs a few million books, and you're you're betting on 0:13:22.200 --> 0:13:24.560 there being a spread between the price of the high 0:13:24.559 --> 0:13:27.120 sulfur and low sulfur fuels. That spread is now really 0:13:27.120 --> 0:13:30.000 really significant. It's two hundred and fifty per ton. We 0:13:30.080 --> 0:13:32.520 calculated that at a hundred and seventy five to two 0:13:32.559 --> 0:13:34.480 hundred dollars, you can pay back one of these things, 0:13:34.520 --> 0:13:37.720 and under two years two you're you're you're pushing closer 0:13:37.760 --> 0:13:41.920 towards eighteen month payback. So really, you know that that's 0:13:42.040 --> 0:13:45.760 that's that's that's going to probably pay off the three 0:13:45.760 --> 0:13:47.560 thousands that that that are that are that are going 0:13:47.600 --> 0:13:48.640 to be stored by the end of the year. We 0:13:48.640 --> 0:13:51.400 think around about three thousand, seven hundred thousand, eight hundred 0:13:51.600 --> 0:13:55.560 are going to be installed in total over the next 0:13:55.600 --> 0:13:57.760 Over the next year or so, it also just seems 0:13:57.800 --> 0:14:00.880 like more time to allow for compliance fuel supply to 0:14:00.880 --> 0:14:03.600 build up. Yeah, well this is the thing, like after that, 0:14:03.720 --> 0:14:05.640 you know, year eighteen months is up and those those 0:14:05.679 --> 0:14:08.240 investments have been paid off, you're probably not gonna write 0:14:08.240 --> 0:14:09.720 I want to install the scouple because you're not gonna 0:14:09.720 --> 0:14:11.040 able to get hold of the three point five fuel, 0:14:11.080 --> 0:14:12.680 are not gonna able to get hold of the dirty stuff, 0:14:12.760 --> 0:14:15.400 so you might as well, you might as well, um, 0:14:16.120 --> 0:14:21.000 look beyond this, this this transition technology and think think 0:14:21.040 --> 0:14:24.040 longer term about how you comply with with tightening regulations. 0:14:24.840 --> 0:14:26.760 There's also a risk and this is this is going 0:14:26.800 --> 0:14:32.080 beyond the current market question. But what's going to happen 0:14:32.120 --> 0:14:35.440 post I Naturally there's going to be a push toward 0:14:35.760 --> 0:14:39.880 even more stringent targets, perhaps constructs on carbon emissions as 0:14:39.920 --> 0:14:45.360 well as sulfur content of fuels, which is causing a 0:14:45.400 --> 0:14:47.480 lot of shiping companies to lose sleep Can we talk 0:14:47.520 --> 0:14:50.720 about that for a second, Like regulations and center of 0:14:50.760 --> 0:14:55.480 mass or where things are going? Who is enforcing these rules? Right? 0:14:55.520 --> 0:14:57.280 So is it just kind of consensus or did they 0:14:57.360 --> 0:15:00.440 ratify something the shipping companies or what are the loosing sleepover? 0:15:00.480 --> 0:15:02.400 If they say just forget it, I'm just not gonna comply, 0:15:02.440 --> 0:15:05.040 who's going to say anything. There's there's two sectors which 0:15:05.040 --> 0:15:08.600 sort of fall outside of the full stool cracks you say, 0:15:08.640 --> 0:15:12.600 of the global climate policy debate. When you look at 0:15:12.600 --> 0:15:15.440 the Paris Agreement, it's structured around country level targets. So 0:15:15.480 --> 0:15:20.920 each country adopts a golfer its long term carbon low 0:15:21.000 --> 0:15:24.920 carbon pathway. International aviation and international shipping are the two 0:15:24.960 --> 0:15:28.040 sectors which fall outside of that framework, because which country 0:15:28.120 --> 0:15:30.560 we're talking about, which country is responsible for those for 0:15:30.560 --> 0:15:32.280 for those missions and for that, for that, for that 0:15:32.320 --> 0:15:34.640 fuel consumption. So what you have is a is a 0:15:34.680 --> 0:15:37.960 sort of delegation of the of the of the of 0:15:38.000 --> 0:15:44.720 the climate policy framework to the multilateral institutions which are 0:15:44.840 --> 0:15:48.400 most well aligned and most well positioned to be able 0:15:48.440 --> 0:15:54.920 to carry the the issue um into some form of 0:15:54.960 --> 0:15:58.040 regulatory framework. So for aviation you have i k OH 0:15:58.120 --> 0:16:01.120 it's the International Civil Aviation Organization, and for shipping you 0:16:01.120 --> 0:16:05.640 have the IMO. And the IMO operates in very much 0:16:05.680 --> 0:16:09.520 the same way as as the UN Framework Commational Climate Change. 0:16:09.520 --> 0:16:12.720 It's a multilateral organization. They have they have periodic meetings, 0:16:13.040 --> 0:16:16.240 they have working groups, they have a number of leading 0:16:16.320 --> 0:16:22.680 voices have they have different UM country groupings and and 0:16:24.360 --> 0:16:28.200 coalitions which which which take on opposing positions and that 0:16:28.280 --> 0:16:33.440 and that drive the debate. So enforcement of this is 0:16:33.520 --> 0:16:36.560 driven through the IMO framework. To answer the question directly, 0:16:37.200 --> 0:16:41.200 enforcements is based at the flag state level. So in theory, 0:16:41.240 --> 0:16:44.480 if if if a ship is noncompliant, for a ship 0:16:44.560 --> 0:16:49.280 is in some way breaking the rules, the procedure is 0:16:49.320 --> 0:16:51.480 to report that ship to the flag states, and the 0:16:51.480 --> 0:16:54.840 flag state is then obligated onto the IMO framework to act. 0:16:55.400 --> 0:16:57.480 The problem is that most flag states don't have the 0:16:57.480 --> 0:16:59.800 institutional capacity to do so because most ships are actually 0:16:59.800 --> 0:17:05.400 flout in quite random parts of the world Mauritius, Liberia, Panama, 0:17:05.560 --> 0:17:10.440 major flag states, and it's mainly because of various tax reasons. 0:17:11.359 --> 0:17:14.000 But but as a result it's it's it's kind of 0:17:14.000 --> 0:17:17.600 an ineffective compliance framework for anything which is going to 0:17:17.600 --> 0:17:22.600 create a meaningful, meaningful disruption or require meaningful levels of policing. 0:17:23.800 --> 0:17:25.879 So there is a discussion underwear them many about what 0:17:25.880 --> 0:17:28.800 to do about this. Do you shift the burden of 0:17:28.840 --> 0:17:32.480 compliance onto the ports state? Which is one way of 0:17:32.480 --> 0:17:35.400 thinking about it. So if you dock your vessel in Singapore, 0:17:35.440 --> 0:17:37.400 if you dot your vessel in Rotterdam, if you dot 0:17:37.400 --> 0:17:40.840 your vessel in the UK, would the authorities in that 0:17:40.920 --> 0:17:45.560 jurisdiction have the have have the ability under the IMO 0:17:45.640 --> 0:17:50.120 framework to impost sanctions or or to to impound vessels 0:17:50.119 --> 0:17:54.639 to to to do what's necessary to enforce compliance. That 0:17:54.840 --> 0:17:59.760 is an unresolved discussion at this time. Is that way 0:18:00.000 --> 0:18:04.000 their industries or other people, investors, companies are interested in 0:18:04.000 --> 0:18:06.760 this because if it transitions to the port country, right, 0:18:07.440 --> 0:18:10.840 and my goods are being held up in port or 0:18:10.880 --> 0:18:14.400 outside of port, then that affects me. My deliveries are 0:18:14.480 --> 0:18:17.520 not being shipped, right. So is that why non shippers 0:18:17.520 --> 0:18:19.399 are worried about I M O or is there something else? 0:18:19.880 --> 0:18:22.919 I think that the main reason why people people paying 0:18:22.960 --> 0:18:25.080 attention to this is because it is likely to and 0:18:25.119 --> 0:18:27.680 already is increasing the cost structure of the shipping industry, 0:18:28.119 --> 0:18:32.200 so increasing the cost of shipping my stuff wherever. Yeah, 0:18:32.320 --> 0:18:34.040 the compliance issue is a bit of a red heron 0:18:34.080 --> 0:18:36.199 because most people are going to comply. The reason why 0:18:36.240 --> 0:18:38.720 most people are going to comply is because the companies 0:18:38.760 --> 0:18:41.960 involved here are major companies, especially on the container sides, 0:18:42.160 --> 0:18:44.280 on the tankering side, They're just not gonna They're not 0:18:44.280 --> 0:18:48.760 gonna risk the reputational damage that non compliance would would entail. 0:18:48.880 --> 0:18:52.400 If if we're talking about small merchant vessels that are 0:18:52.440 --> 0:18:54.439 that are that are moving between ports in the region, 0:18:55.040 --> 0:18:56.520 that they are probably going to get away with it, 0:18:56.840 --> 0:18:59.680 then yeah, there's going to be non compliance. But we're 0:18:59.680 --> 0:19:02.520 talking in terms of tons of fuel. We're talking we're 0:19:02.520 --> 0:19:07.240 talking small numbers that the major components of demand in 0:19:07.280 --> 0:19:11.120 the international shipping segment are contain a line as tankers 0:19:11.119 --> 0:19:14.840 which are going between major ports, and therefore we're gonna 0:19:14.960 --> 0:19:18.359 we're gonna likely see high high compliance rates across across 0:19:18.440 --> 0:19:22.200 the volumes that matter. The cost structure question is really 0:19:22.200 --> 0:19:26.760 interesting one because the global shipping industry, I'll take a 0:19:26.760 --> 0:19:31.960 step back, there has been a really surprising coalition of 0:19:32.000 --> 0:19:36.040 support for the IS and I followed I've followed through 0:19:36.080 --> 0:19:41.000 my career the climate negotiations and regulatory um discussions at 0:19:41.000 --> 0:19:44.040 the international level for many years, and and and and 0:19:44.400 --> 0:19:47.440 has never ever been a situation that I've seen where 0:19:47.560 --> 0:19:54.000 governments and business and civil society all agree on the 0:19:54.040 --> 0:19:57.639 approach that's being taken and wanted to be implemented as intended. 0:19:58.600 --> 0:20:03.439 If you look at at the aviation discussion in comparison, 0:20:03.880 --> 0:20:06.520 there's there's a huge disconnect between the principles that the 0:20:06.520 --> 0:20:09.240 regulators want to work toward and what the aviation industry 0:20:09.240 --> 0:20:11.320 want because there is no credible pathway the for the 0:20:11.359 --> 0:20:14.400 aviation to reduce CEO two emissions, which is the discussion 0:20:14.440 --> 0:20:17.679 under the IK framework at the moment. For though, the 0:20:17.720 --> 0:20:20.439 reason why the shipping industry are on board is because 0:20:20.480 --> 0:20:24.960 there's a big surplus of capacity in the market, and 0:20:24.960 --> 0:20:27.199 it's been there pretty much the financial crisis. For all 0:20:27.200 --> 0:20:30.280 the vance crisis is very high increase in the rate 0:20:30.320 --> 0:20:35.000 of ship building. That overhang is still really really depressing 0:20:36.080 --> 0:20:39.359 shipping rates globally across almost all segments, but particularly in 0:20:39.359 --> 0:20:42.959 the tank, in the in the in the bulk carrier segment. 0:20:43.680 --> 0:20:48.679 So if you're MASK or CMA, CGM or Happy gloydal 0:20:48.760 --> 0:20:52.080 one of the other big container container liners, or if 0:20:52.119 --> 0:20:57.200 your costco um or one of the other big book carriers, 0:20:57.240 --> 0:21:00.359 what you what you want is to you want to 0:21:00.440 --> 0:21:03.399 flush out the smaller players. You want to try and 0:21:03.440 --> 0:21:05.480 get rid of that over capacity. So what this what 0:21:05.560 --> 0:21:07.480 this is, What this does is it increases the cost 0:21:07.480 --> 0:21:09.760 structure of the industry. The people who are less equipped 0:21:09.800 --> 0:21:12.320 to deal with that increase in costs are smaller players. 0:21:12.880 --> 0:21:14.879 They you're going to get out of business first. You 0:21:14.920 --> 0:21:16.280 might have a little bit of pain if you're one 0:21:16.280 --> 0:21:17.760 of the one of the bigger players, but it's going 0:21:17.760 --> 0:21:20.800 to be to your benefit ultimately because because hopefully the 0:21:20.800 --> 0:21:24.760 whole market can be brought back into balance. So um So, 0:21:24.840 --> 0:21:29.480 I think that in terms of cost the too dynamics 0:21:29.480 --> 0:21:31.439 of play one is the fuel costs going to go up, 0:21:31.840 --> 0:21:33.880 But we're not talking a huge amount here. We're talking 0:21:33.880 --> 0:21:37.600 for a container to be shipped Fromrottenham Singapore's approximately an 0:21:37.640 --> 0:21:40.960 increase of fifty And I live in Singapore. When I 0:21:40.960 --> 0:21:43.320 moved out of there, moving my stuff costs thousands of 0:21:43.359 --> 0:21:46.600 dollars in containers, So you know, we're talking about um 0:21:47.600 --> 0:21:50.280 a couple of percentage points in terms of in terms 0:21:50.280 --> 0:21:56.160 of the cost of transporting goods. However, the real shift 0:21:56.880 --> 0:21:59.879 or potential shift in the cost of shipping is not 0:22:00.000 --> 0:22:02.080 going to come from increased fuel prices. It's going to 0:22:02.119 --> 0:22:04.960 become from come from a tightening of capacity in the 0:22:05.000 --> 0:22:08.919 shipping market, which I'm is not in itself going to 0:22:08.920 --> 0:22:14.000 bring about, but it's definitely going to It's definitely going 0:22:14.040 --> 0:22:17.720 to work in that direction. What are you watching for 0:22:18.840 --> 0:22:20.480 on January one? What are you going to know on 0:22:20.600 --> 0:22:22.760 January one that you don't know now? The first thing 0:22:22.760 --> 0:22:25.040