CII and the S&P market - How do you optimise your operational returns without endangering the asset value of your fleet?
In January 2023, the International Maritime Organisation’s Carbon Intensity Indicator (CII) regulation entered into force. In essence, the CII is an efficiency rating per vessel that rates each vessel larger than 5,000 gross tons into rating categories from A to E.
The regulation requires ship owners whose vessels are in an “E” rating or in a “D” rating for three consecutive years to present a plan with corrective actions to bring the vessel into a “C” rating. The exact consequences of what happens if ship owners fail to follow this plan is still vague. We have thus seen many ship owners starting into the new year with a big question mark on how serious this CII rating will be after all.
Now we see first indications that the S&P market is taking the CII rating very seriously indeed. As a recent analysis from VesselsValue shows, bad CII ratings are limiting the number of S&P transactions of the affected vessels especially in the tanker and bulk segments. VesselsValue estimates that an “E” rating decreases the value of a vessel by 12%, a “D” rating by 3%. Please note that this is an initial market reaction after not even three months of the CII rating being in force.
Consequently, ship owners need to develop a long-term CII strategy that looks at operational optimisation without risking significant losses in revenues from their S&P activity.
The CII rating is calculated by measuring the emissions of a vessel per cargo-carrying capacity and nautical mile. There are three main levers that drive the CII:
There is a short-term and a long-term perspective to optimising your CII.
Short-term, ship owners who try to maximise their operational profits might accept a “D” rating for a couple of years and even an “E” rating for a year. As long as the charter market does not punish a bad rating with lower demand (and lower freight rates) for such a vessel, one can assume that
So none of the necessary CII investments or operational changes seem sensible and ship owners and operators will stick to business as usual to maximise their short-term profits.
Long-term however, ship owners will always look to benefit from market opportunities to sell their vessels with a profit. So when this market opportunity comes (which is hard to predict as we have all learned from Martin Stopford) your vessel should be in top shape.
Imagine you are owning an Aframax tanker, built in 2007, 116,000 DWT and the sales price in a good market (like 2022) would be EUR 40 million. Now VesselsValue’s analysis tells you that for tankers specifically the negative value effect of an “E” rating is 15% and 4% for a “D” rating (see graph above).
That means getting the vessel into a “C” rating if it comes from “E” should be worth EUR 6 million (15% of 40 million) to you. Getting to a “C” rating if you are in a “D” rating should be worth EUR 1.6 million.
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What revenues and costs in daily operations do you need to count against that? The answer will depend on many variables, among them
There will be no easy answer. In fact, it is the new daily task of chartering and operations teams to observe market dynamics and to closely align with technical management as well as the S&P team to understand what to optimise for and to weigh different options against each other.
Let us look at a concrete example (arguably with very simple assumptions and somewhat comparing apples with pears)
Imagine you are the chartering manager of a vessel that’s currently trading in an “E” rating and the S&P team is telling you to bring it back into a “C” rating because they want to sell it in the nearer future. Now you want to understand how to do this and what it will cost you in operational income. Let’s assume you use our zero44 software to build scenarios along your different options. Scenarios will allow you to play with all key variables of the CII and give you a concrete answer on what you need to change to make a specific CII rating happen.
In the following example the vessel is starting from an “E” rating (Base Case)
Imagine that in their scenario “How to get to “C”” the users have changed the average speed at sea from 17 to 12 knots (obviously not a tanker example) while keeping the trading pattern between “port” and “at sea” times stable. The zero44 algorithm predicts that this dramatic change in speed in the remainder of the year gets the vessel into a “C” rating.
However, while this vessel would have covered 87,000 nm with the original speed, it is now at only 67,000 nm. That’s a 23% loss in productivity - and should result in similar losses in revenue.
Back to our Aframax tanker that could earn 56,000 USD per day in 2022 (see Clarksons Research). If we very simply apply our 23% productivity loss to that number, the ship owner would lose 12,880 USD per day from achieving a “C” rating.
From an S&P perspective the change in CII should be worth USD 6 million (see above). If we assume 360 trading days, we could spend 16,667 USD per day for CII improvements. So in this obviously simplified and not accurate example the CII change would be the right call. We are only losing 12,880 USD per day - that’s a net gain of 3,787 USD per day or 1,363,320 USD in total.
Contact us if you want to learn more and apply this (with certainly more accurate calculations) to your own shipping business.