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News : Baltic Exchange releases important emissions data for main dry bulk routes
The Baltic Exchange has moved to provide a hugely valuable missing link that shipping will need on its path towards decarbonization.
The London institution has calculated a set of indicative CO2 emissions figures and Energy Efficiency Operating Indicator (EEOI) reference values. Initially, these cover the standard Baltic vessels trading on the various dry bulk routes.
With new International Maritime Organization rules on energy efficiency coming in over the next couple of years, shipping – or at least the dry bulk sector – will now have access to a market-based benchmark using real emission data instead of theoretical models as a vital compliance tool.
“By understanding the variability in operating efficiencies across routes and size classes, owners and charterers will be able to take practical steps to minimize their carbon footprint,” the Baltic Exchange stated in a release.
Currently, whilst vessel owners and operators may have access to such information on their own fleets, a lack of available reference data makes market-level comparisons more challenging.
For each route, a calculation of total CO2 emissions based on vessels traveling at both full and eco speed has been made as well as EEOI values.
The EEOI is one of a range of measures that the IMO has endorsed to support and measure the shipping industry’s progress towards its carbon reduction goals and provides insight into a vessel’s efficiency at sea.
The EEOI enables operators to measure the fuel efficiency of a ship in operation and to gauge the effect of any changes in operation, such as improved voyage planning or more frequent propeller cleaning, or introduction of technical measures such as waste heat recovery systems or a new propeller.
An annualized, weighted-average portfolio level calculation of the EEOI serves as the primary metric used by the Sea Cargo Charter (SCC) to track organizational alignment to IMO decarbonization trajectories.
At this stage, these figures have been calculated based on the typical vessel and voyage characteristics. Baltic Exchange members are being encouraged to provide feedback and to provide their own findings and operating performance which the Baltic can then use to validate, maintain and update the index EEOI values.
By way of an example of how much capes are performing CO2-wise on key routes according to the new data from the Baltic Exchange,
BAI Index: After June Head Fake, Rates Rise Again in Anticipation of Healthy Holiday Peak
We cautioned last month that cooling in rates was likely to be short-lived, and as we see a re-acceleration, particularly on U.S.-bound routes, that may turn out to be just the case. Lapping the PPE surge from 2Q20, year-over-year rates continue to exceed the already elevated 2020 comparables by a significant margin. BAI’s HKG to Europe and PVG to Europe basket indices rose 44% and 33% year-over-year in July, respectively, while HKG to North America and PVG to North America rose 59% and 51% year-over-year, respectively.
We think there are a few considerations here, beginning with the march of seasonality. It’s almost silly to think about seasonal patterns in a market as fraught with disruption and chaos as this one, but at the risk of oversimplifying the equation, there are consumption patterns that drive the flow of goods regardless of this historically unprecedented capacity situation.
As we outlined last month, the potential for the first back-to-school season in two years, and the first holiday peak season with an opportunity for brick and mortar shopping and in-person family gatherings are expected to drive healthy baseline demand.
Similarly, but perhaps more importantly, the feared “freight cliff” from a goods-to-services rotation is nowhere in sight, in our view, at least not in U.S. end markets.
In the June column, as well as our published investment research from last November, we pointed out that the U.S. household savings rate had ballooned to more than double its ~7% historical average after the pandemic, and that this rate, in concert with continued government stimulus, would serve as a robust shock absorber to goods-based spending as the economy reopened.
Indeed, U.S. household savings has come down to approximately 10%, according to Bureau of Economic Analysis data. So there is still room to go and retail sales data remains steady.
With the seasonal ramp toward the fourth quarter holiday peak in full swing and apparent momentum in spending on consumer goods, retail inventory to sales ratios is still near record lows.
With the seasonal ramp toward the fourth quarter holiday peak in full swing and apparent momentum in spending on consumer goods, retail inventory to sales ratios is still near record lows. Anecdotally, one large retailer said that even if it shut down all of its stores and just focused on replenishing inventory backlogs, it would still take months before things were back to normal. So shippers are fighting to play catch up in addition to meeting robust new demand, in our view.
As high as air freight rates are right now, with detention and demurrage and the risk of stock out, the traditional gap between fully-loaded ocean costs and air freight rates may have actually narrowed, on average, from their traditional low-double-digit multiple ranges to something closer to mid-to-high single digits. Ultimately, we think that is driving more relative demand for air cargo.
But wait. There’s more. In April, we said to expect volatility in global air cargo spot rates to be amplified by the structural capacity tightness in the market. And we think we are seeing just that. Sporadic COVID lockdowns at the port of Yantian and elsewhere in Asia have pushed eastbound transpacific ocean box rates to multiples of historic levels.
As high as air freight rates are right now, with detention and demurrage and the risk of stock out, the traditional gap between fully-loaded ocean costs and air freight rates may have actually narrowed, on average, from their traditional low-double-digit multiple ranges to something closer to mid-to-high single digits. Ultimately, we think that is driving more relative demand for air cargo.
Some have pointed to the inflow of passenger-to-freight conversions—which have been dubbed “freighters” (a moniker that we’ve adopted grudgingly)—to provide incremental capacity. But these are insufficient to meet the demand, in our view, and they address the symptoms of the problem, not the root cause.
Ultimately, these conversions are temporary, and will only be deployed in the tightest of markets when rates are beyond a certain threshold, only to be pulled back when those rates decline. Widebody belly capacity is still in the high-teens to low twenty percent range below where it was in 2019, depending on the lane, in our view—and demand is for the most part much higher now than it was in 2019.
