Do ‘Eco ships’ make financial sense?

Recent analysis by BIMCO says that the new generation of ‘Eco ships’- cost effective and environmentally friendlier because of lower fuel consumption- may make  economic sense in the not too distant future despite costing about 25% more to build. The present freight rates may not appear to justify the additional investment, but, according to BIMCO’s chief shipping analyst Peter Sand, “ECO ships seem to be the best profitable choice for the future fleet.”

Sand backs up his opinion with numbers. "Our calculations show that, should you choose to invest in an ECO MR2-tanker, you could pay up to 25% more for your vessel before settling for a non-ECO MR2-tanker,” he says. “BIMCO has been looking at the basic economics of this development and can conclude that a fairly large premium can be paid on newbuildings to operate ECO ships instead of traditional ships. The calculations that are based on our assumptions, disclose that a 15% savings on fuel, potentially enables the owner of the ECO ship to charge extra up to the amount that is saved in fuel – which is USD 2,197 more per day than what a regular vessel can ever get. The extra income means that a ship-owner can pay up to USD 8.31 million more for an ECO ship for the investment to be equally good or better off as compared to a standard tanker. That is a premium of 25% when the standard vessel is priced at USD 33 million" he said.

Sands did not elaborate on the additional advantage that Eco ships have- compliance with the ever tightening emission regulations that makes older ships much more expensive to run, especially if they have to be retrofitted with expensive machinery. Analysis indicates, though, that a rough thumb rule could be used by shipowners to determine how much more they should pay for new Eco ships and still come out ahead. “Based on the same fuel consumption and fuel prices assumptions, a ship-owner can pay up to USD 5.5 million more for an ECO ship for every 10% of fuel savings – or 17% more when a standard vessel is priced at USD 33 million”.

Of course, rising bunker prices make Eco ships even more attractive, but the analysis implies that this assumption can be sometimes misleading, considering the initial investment involved. “The bunker price has to exceed USD 1,060 per tons to make a new ECO ship an investment, with a positive NPV, if the ECO ship is priced at USD 33 million,” it says. "At the current 1 year time-charter rate of 12,750 USD/day, a standard vessel does not meet its cash-breakeven rate making the investment unprofitable with an NPV loss of USD 13.5 million – more than the initial equity outlay. Even if we were able to secure the ECO ship at a cost of USD 33 million the investment will still be unprofitable, despite being able to charge a fuel-savings premium of 2,197 USD on top of the time-charter rate, making an NPV loss of USD 5.2 million. The bunker price has to exceed USD 1,060 per tons to make a new ECO ship an investment, with a positive NPV, if the ECO ship is priced at USD 33 million.”

This could change, quickly, says the analysis, as “higher freight rates are expected to be part of not too distant future.” Today, though, an Eco ship should not cost “more than USD 27.8 million to be a profitable investment for a ship-owner. Comparably a standard vessel must cost as little as USD 19.5 million to be profitable in today’s market.”

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