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Decarbonisation programmes set by the International Maritime Organization (IMO), shipping’s regulatory body, will be one of the most difficult tasks for the industry in the coming years. This starts with the implementation of the EEXI, and CII criteria, all of which aim to reduce carbon intensity and will impact prices of the existing fleet. The first phase begins in January 2023. Specifically, beginning in 2023, essentially all current ships must fulfill a specific CO2 emission limit per cargo capacity. Because energy efficiency criteria will become increasingly demanding over time, the majority of the older existing worldwide fleet will not meet the new EEXI requirements. According to Simpson Spence Young, less than 25% of bulk carriers and tankers currently comply, leaving the balance of the fleet vulnerable to either energy power limits or some sort of CO2 offset. EEXI and CII During MEPC 76 in June this year, the IMO introduced an Energy Efficiency Design Index for existing ships (EEXI) addressing the technical efficiency of ships and the Carbon Intensity Indicator (CII) rating scheme addressing the operational efficiency. The EEXI is applicable for all vessels above 400 gross tons (gt) falling under MARPOL Annex VI. The CII requirements will take effect for all cargo, ropax and cruise vessels above 5,000 gt and trading internationally. The CII measures how efficiently a ship transports goods or passengers and is given in grams of CO2 emitted per cargo-carrying capacity and nautical mile. The ship then receives an annual performance rating ranging from A to E, whereby the rating thresholds will become increasingly stringent towards 2030. While the EEXI is a one-time certification targeting design parameters, the CII addresses the actual emissions in operation. Market-driven mechanisms will begin to tease out differentials in values across the vessel emissions spectrum A ship rated D or E for three consecutive years would have to submit a plan for corrective action, to show how the required rating (C or above) would be achieved. These amendments are expected to enter into force on November 1, 2022, with the requirements for EEXI and CII certification coming into effect from January 1, 2023. This will allow the first annual reporting on carbon intensity to be completed in 2023, with the first rating given in 2024. MEPC 77, held this week, will include the latest on measures to reduce GHG emissions from ships including the continued implementation of the EEXI and the CII. Impact on existing fleet value The introduction of the EEXI and CII presents a giant question mark for both charterers and shipowners when it comes down to operating profiles of the vessels and how much this is all going to cost, according to Kris Fumberger, RightShip’s head of sustainability and environment. The method of demonstrating EEXI compliance differs depending on whether the vessel was built before or after January 2013 (pre-EEDI/EEDI-certified). As the industry is focused on compliance with EEXI, Konstantinos Lourandos, managing director of Wallem’s Cyprus operations, argues the implications from the compliance with CII will radically change the shipping industry, citing emission data studies which have shown that the great majority of the existing ships will not comply unless energy abatement measures are being implemented, such as reducing speed. This will create a two-tier market That being said, although through slightly different mechanisms, EEXI and CII will impact fleet operations and therefore freight rates and values, Burak Cetinok, head of research at Arrow Group tells Splash Extra. "Simply put, older, inefficient ships will be affected significantly more than the modern tonnage. This will create a two-tier market," says Cetinok. He argues that older, heavy consuming ships will not be able to speed up much in a strong market and that therefore their productivity and the ability to exploit strong rates will be capped by their top-end speeds. "Charterers will probably prefer more eco-ships as a result or offer discounted rates due to these shortfalls. That will ultimately have a negative impact on asset values too,” says Cetinok. Fumberger also believes speed limits on older tonnage will have a knock-on effect when it comes to chartering decisions. "RightShip is not in the valuation business, however, we do know from our customers that understanding operational speed profiles of vessels is a top priority, and that without this additional visibility, it is likely that newer vessels will be prioritised," he says. S&P market According to Dr. Adam Kent, managing director of Maritime Strategies International (MSI), as emissions regulations and monitoring becomes increasingly more stringent and with the implementation of EEXI and CII around the corner, these directives will undoubtedly begin to have an impact on the sale and purchase market, both in terms of preferential sales candidates and tangible value differentials over the course of the next 12 months and beyond. Nevertheless, Kent notes that teasing out the real value impact the better performing vessels have had on secondhand values over the last 12 months has been difficult, due to the broader market dynamics. "For the container sector, and to a lesser degree the bulker sector, sellers have been able to name their price for anything that floats given the immediate earning potential these assets have afforded their new owner, whereas tankers have sat at moribund levels for so long that all prices have generally been subdued, regardless of exact vessel specifications," asserts Kent. The shipowner's predicament A significant shift is underway, leading to the widespread adoption of green energy technologies in the following decades. Ships and shipping companies that underperform on EEXI and CII metrics are likely to become less attractive on the charter market and hence less desirable on the S&P market. "Non-eco ships are already being discounted in the S&P market," observes Arrow's Cetinok. However, he reckons that if the market fully values in the effects of the impending restrictions on fleet operations and the freight market in the following months, discount rates may get higher. Ossi Mettälä, customer success manager at NAPA Shipping Solutions, believes that from an EEXI perspective depending on the vessel age and prospects, "some owners and operators may even be scrapping vessels earlier than envisioned”. Wallem's Lourandos argues that however the EEXI and CII compliance is achieved, it will come at a cost for shipowners, something class society DNV has also warned. "Shipowners will have little time to decide whether to invest in new technologies, seek financing or simply scrap their vessels, and technology providers will have the task of persuading them that the efficiency benefits of their solutions justify the investment," he says. Mettälä shares a similar view as Lourandos and Cetinok. Regarding the CII perspective, he estimates new regulations bring unique uncertainties that are set to shake the status quo. "Currently, everyone from shipowners to charterers, brokers, shipyards, and consultants are feverishly trying to figure out how the new regulations will impact business. Is it time to sell, invest, or wait?" MSI's Kent reckons 2022 will see a greater focus on regulations as the IMO encourages administrations, port authorities and other industry stakeholders to favour vessels with the best CII ratings. He sees pressure also coming from end-users, investors and shareholders, meaning that market-driven mechanisms will begin to tease out differentials in values across the vessel emissions spectrum. Kent tells Splash Extra, however, that "what is not so clear right now is the balance between value premiums and discounts and how this dynamic evolves over time." For RightShip's Fumberger, there is no doubt that the introduction of EEXI and CII will, at some stage, have an impact on shipowner and charterer bottom lines. "Ultimately, the key to driving down emissions while retaining supply chain success will be the right ship with the right specifications to meet market requirements," he concludes.

How EEXI and CII will impact the S&P market

Upcoming legislation will change the prices of many ships in operation today.

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