Going Green and its Impact on Finance

By May 16, 2024 May 21st, 2024 No Comments

In recent years, a very important topic has become the centre of many discussions in the shipping industry. If it wasn’t obvious from the title, I’m talking about the environment. Many terms that were once foreign to members of our industry have now become common parlance: scrubber, SOx, NOx, carbon capture, rotor sails, Mewis duct, dual fuel, EEXI, CII, green, ammonia, fuel cells and, of course, the chorus of ‘Let it go’ from Frozen.

Let me start by stating something which is of paramount importance when it comes to the environment: climate change is real and the human race is absolutely responsible for it¹. Most people of my generation want to make sure that there is a future for our children and grandchildren – one where we are not living in underground bunkers growing food from our homemade manure.

However, decisions have been made on the political level which now affect conversations in almost all aspects of our industry. Shipping has been called upon to greenify its act, despite being the industry that is responsible for moving the vast majority of global cargo to keep people fed, clothed, housed, warm and not in the dark², while creating less than 3% of global carbon emissions. With numbers like these, the maritime sector is the cleanest method of transportation and yet a lot seems to be expected of it. Shipowners are expected to meet ever-changing requirements despite the fact that they don’t design the ships or engines and they don’t produce the fuel.

Strangely enough, despite the industry getting frequently vilified for being “not green enough”, most, if not all, of the clients and friends in the industry that we speak to, are happy to be greener. They are happy to install things that make sense, happy to look at new designs, happy to slow down (which makes sense for many reasons), happy to look at fuels of the future. But what is the fuel of the future? Shouldn’t cleaner fuel be cheaper and more available? Should rotor sails be on every ship? How do we renew our old fleet if middle-aged vessels don’t fit in banks greener agendas? How are shipowners supposed to make decisions when these answers are still up in the air?  Who will build or convert the 100,000 odd ships that “pollute” our planet?

Policymakers seem to be perfectly happy for a shipping company to spend a significant premium to also burn LNG, but then they already plan to phase out LNG as it is also a fossil fuel, albeit cleaner than fuel oil. Furthermore, LNG also isn’t readily available in many ports and LNG bunkering vessels barely exist. Ammonia storage is complex, costly and is even less available than LNG is at present even finding ULSFO has had its challenges. This ends with many shipowners not knowing what to order. 

¹And if you’re a denier, then I’ll politely ask you to go read something else
²Not to mention an obscene amount of useless stuff from Wish or Temu

The ones that have ordered conventional-fuel vessels might be banking on the fact that the phaseout will take longer or that the regulatory changes will be manageable. Then, of course, is the question of retrofitting engines to take on cleaner fuels like ammonia and methanol on existing ships, which will also be costly.

The existing fleet and its contribution to emissions 

First, let’s look at the existing fleet and the current orderbook. The global fleet stands at a little over 108,000 ships, of which about 6,600 are 20-25 years old and a shocking 38,745 are over 25 years old, the age traditionally considered to be the end of the lifespan of a vessel. This does not necessarily apply to all types of ships, as some are ‘cleaner’ than others. There are also some outliers which were built a very long time ago and still operate to some degree.  

If we look more closely at the main commercial cargo ships, i.e. Tankers, Bulkers and Containerships, we see that the vessels are, very slightly younger. Looking at the data, we can see that most of the old vessels that appear above tend to be on the smaller size, e.g. 3,334 tankers up to 10,000 Dwt that are older than 25 years old. 

Then if we look at the orderbook, we see that the fleet development over the next few years will see definite increase in tonnage (hopefully some scrapping as well, based on historical scrapping). Overall, the fleet development shows a growth of 38% over the past decade, which must be necessary given that global trade is expected to keep growing. 

However, despite this increase in overall capacity and tonne-miles, the emissions growth rate is diminishing. Yes, there has been an increase of 20% in all Greenhouse Gases GHGs over the past decade according to the UNCTAD, but at a lower rate than the fleet growth rate, almost half. Moreover, CO2 emissions in the shipping industry have actually remained more or less the same in the past decade. This clearly indicates a step in the right direction and the reason is simple: shipping is getting cleaner. 

Carbon emissions have grown by almost 8% worldwide in the past decade, but have only increased by 0.53% in the shipping industry. If this number has remained steady despite the 38% capacity increase, then it is logical to surmise that fuels are getting cleaner, engines are becoming more efficient and vessel designs and add-ons are decreasing consumptions³. The reason why politicians are choosing to go after shipping is that the number of owners is significantly smaller than that of some other vehicles (like trucks and cars) and is therefore an easier target. The problem with politicians (I’ll focus on one of the problems with them, otherwise we’ll be here all day) is that they often promise the desirable outcome without necessarily giving due consideration to whether it is doable.

³Not to mention the efficient practices of individual operators.

How important is Shipping? 

While we agree that shipping must play its part for a brighter and greener future, we also feel like the industry’s contribution to global trade far offsets its GHG emissions. Just a quick glance at any of the commodity information sites like Index Mundi or the Observatory of Economic Complexity will show you just how much trade goes on and how necessary it is for sustaining 8 billion people. That isn’t to say that we shouldn’t be striving for zero emissions, just that owners or operators shouldn’t be penalised for something out of their control.  

Our point of contention is that shipping is being penalised, despite being a global necessity and, as can be seen below, by far the cleanest and most efficient mode of transport per metric tonne of cargo in the supply chain⁴:

Air freight’s contribution is laughable because planes are dumb (when it comes to carrying cargo)!

Now, it is important to note that shipping is not being directly penalised financially yet, although this year the EU’s Emission Trading System comes into effect. However, access to competitive financing is becoming more challenging for ‘less green’ projects. But, why? How is that shipping companies are being held responsible for not being green when they don’t develop the engines that burn the fuel and they don’t refine the fuel that is even used. They are able to invest in some technological add-ons that can help reduce emissions, but some of these can be quite costly to install on a ship, and near impossible to retrofit. 


Follow the science, not the policy 

In a recent discussion we had with researchers at UCL’s Energy Institute, we were told that Ammonia seems to be the best candidate as a long-term zero carbon fuel. From our perspective, the present challenges lie with safety, the availability of fuel and the cost to build ammonia-capable ships or  retrofit the existing ones. I imagine that from a safety perspective, most operators would be reluctant to put their crews on vessels with a very toxic fuel without strong evidence of safety, both in delivering the fuel from shore to ship, but also from tank to engine.  There is also a chicken or egg scenario since bunkering facilities need to be available in order for ships to be built or retrofitted with ammonia in mind. Whereas, on the other hand, there need to be ships available to make such bunkering terminals viable as business cases. Such projects would need NGO and industry association support in order to illustrate their viability. We highly recommend you take a look at Lloyds Register’s Zero Cabon Fuel monitor, which has plenty of information on readiness levels. 

An additional problem is fuel storage capacity and the frequency a vessel would have to refuel. If we also take a look at hydrogen as a fuel, then we discover this is also not a practical solution. Hydrogen is very much available and 1kg of hydrogen can put out 120-142MJ of energy, which would be highly impressive, if it didn’t take 11m3 worth of space. To be honest, this is a bit deceptive of me, since this is hydrogen in gas form. If we look at things a bit more fairly and compress the hydrogen to the optimal liquid form, it puts out 9.55MJ per litre – ammonia stands at 12.8MJ/L. Then you compare this to other fuels as can be seen below and you realise that the viability of these fuels is more complex (incidentally, both Ammonia and Hydrogen are significantly more costly). 

Furthermore, according to the researchers at UCL’s Energy Institute reducing consumption to be compliant with CII, whether by adding energy-saving systems or slower steaming, is the thing that makes sense until retrofitting becomes possible. Even something as simple as keeping your hull clean of biofouling can make a vessel 10-15% more fuel efficient. Some of these energy-saving systems can be quite costly, but make sense over a 10-year period. In the case of rotor sails, you can even take them with you if you decide to sell the ship and install them on another one of your vessels. 

According to the UNCTAD’s Review of Maritime Transport, dual-fuel engines will have an increased price of 10-20% over the current newbuilding price. A similar cost is expected on converting vessels, but this will depend on whether the vessel is alternative fuel-ready or not at all. Engine manufacturers should be ready with ammonia retrofit packages in 2025. Overall, estimates of $8 to $28 billion will need to be spent annually on ships to get to the zero target of 2050 and $28 to $90 billion will need to be spent annually onshore for production, distribution and bunkering infrastructure. 


The problem with shipping finance 

So now we come to our area of expertise, which is shipping finance. We have seen many major lenders in the shipping industry join the Poseidon Principles, which supposedly shifts the strategy towards greener projects with a focus on newbuildings above all else (although we have seen many transactions concluded that do not follow the Poseidon Principles). This is logical since newbuildings, especially those with new fuel capable/ready engines and various bits of green tech will always tick more green boxes than second hand ships. However, this ends up leaving quite a big funding gap for owners looking to renew their aging fleets. 

Owners will no doubt be looking to replace their old vessels, which comprise a significant portion of the fleet. Those that have significant balance sheets and younger fleets will mostly look towards newbuildings. Whereas those with old ships will look towards younger tonnage. The latter, however, don’t tend to get as good terms as the former. Additionally, many of them won’t even be onboarded by many major lenders since they do not fit within their greener policy. But this greener policy is sometimes misguided. If we want to see a greener shipping industry, then we need to get rid of the older ships. The only way owners will replace their older ships is if they can buy younger ones – and younger vessels built in the early 2010s are greener than those built in 1999. This isn’t just so business can survive, but also as a requirement of global trade growth.  In other words, the Poseidon Principles signatories should be looking to help make the industry as a whole greener and not just their own shipping portfolios. The only way to do this is to assist owners in replacing the oldest ships with younger ones. As an aside, financing a 10-year old ship is often lower risk than a newbuilding, especially when the prices are high. Aside from being able to operate as soon as it changes hands and not wait for delivery, the amounts are also smaller than newbuilding prices. Policy-makers and regulators also need to get onboard with this for a more realistic road to net zero.

The ship financing mindset needs to take this into account, otherwise stakeholders are claiming to be green because of regulatory obligation rather than an ethical compunction to save the world. Even scrapping a vessel before it is ‘too old’ is a non-green decision since you actively choose to build something newer and use up more resources to do so. Then comes the decision to retrofit older vessels. Are financiers willing to provide better terms for small and medium-sized shipowners to retrofit vessels given the high cost? Finally comes the matter of cyclicality in shipping.

At the moment, newbuilding prices are considered high by many owners. The market is expected to continue performing well in some sectors, but this will not last forever.

If we take the average price of $26.4m of a Kamsarmax ordered between 2015 and 2019 and increase it by 20%to take into account possible green extras and dual fuel capability, we get a price of $31.7m. Using the terms below for a 2015-2019-ordered newbuilding versus the same now-retrofitted Kamsarmax, we get the following breakeven averages over the 8-year period.

An estimate based on the many different things I’ve read…..yes, I can read

Looking at the 10-year average rates for 2014-2023, we get an average of $12,534 per day, which falls just short of the average breakeven for a green ship and that’s with a generous profile and assuming you can get a margin of 2% from your bank (you could also lower the loan to 60% of the value). What happens though if you are losing $5,000 per day? What happens if this is the scenario across multiple ships? I can assure you that the EU will not be footing the bill to help you comply with the greener policies. 

So if a shipowner ordered a ship and then decided to retrofit it 5 years or so after delivery to make it a green vessel, then they might struggle to break even in a bad market. A newbuilding ordered at today’s price of $37.5 million (at time of publishing), which will still require retrofits, will be losing money hand over fist in a bad market.  Does this mean that some owners are simply priced out and part of the world fleet fades? Will the larger shipowners be able to pick up all the slack if this occurs? Will banks consider longer tenors with lower margins? 

So what is the point of our cursory insight into greener shipping? Our point is that the financial viability of going green may be very challenging. Governments are unlikely to subsidise ocean-going shipping projects since they don’t necessarily add much to their economies’ GDPs, even though shipping companies of all sizes employ people. On the other hand, they still expect the industry to get cleaner, although it is already much more environmentally friendly than all other modes of freight transport. 

On the banking side, we have seen many major lenders exiting the shipping industry, even in the past 18 months. Many of the remaining banks decrease their exposure, despite the importance of shipping to global trade, focusing mainly on large companies. 

It has long been said that small family-run businesses are the backbone of the economy, so shouldn’t financiers be supporting them too? Yes, financiers have the challenge of dealing with upcoming changes to Basel guidelines, which decrease their available capacity for shipping projects, but a diversified portfolio of shipping clients will assist them with their risk management processes. Supporting those smaller shipping companies, some of which have been around for a very long time should be an additional area of focus for shipping banks . At the end of the day, all shipowners will need to renew their fleets and this will always be a going concern. All we are suggesting is not to forget the smaller fish out there, who are also trying to go green, because they are a very big part of the shipping ecosystem; and a 10-year old ship is certainly much greener than a 25-year old one. 


Sources and Further reading 

In my process of writing this paper, I have sourced plenty of information and made graphs/charts from the following sources: 

  • UNCTAD Review of Maritime Transport – September 2023 
  • UMAS ( & UCL Energy Institute 
  • ABS Outlook
  • Clarksons World Fleet Register and Shipping Intelligence Network 
  • Clarksons Shipping Review and Outlook 
  • Lloyds Register – Zero Carbon Fuel Monitor 
  • IMO – Fourth Greenhouse Gas Study 2020 
  • Global Maritime Forum 
  • Statista 
  • DNV.GL – Comparison of Alternative Marine Fuels 
  • MAN Energy Solutions 
  • Maersk Mc-Kinney Moller Center for Zero Carbon Shipping 
  • MIT Climate Portal 
  • Alternative Fuels Data Center 
  • Wikipedia (because you can always find something there) 
Gerasimos Zolotas
Executive Director

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