In this interview, we sat down with Fujio Sekiguchi and Ryo Sekiguchi, President and General Manager of Koyo Kaiun Co., Ltd. a leading shipping firm specializing in chemical tankers. We discussed how the current Covid situation and other global logistics disruptions have impacted their activities, and the shipping industries path to carbon neutrality.
Several factors have contributed to 77% of international ports reporting severe to significant delays in shipping over the last fiscal year. Why do you believe these disruptions have taken place, and what do you believe could be done to prevent it from happening?
Unlike the container market, we’re not seeing major congestion in the chemical tanker market. Off course we run into berth congestion/tank ullage issues sometimes but berth delay is more like a few days. For bulk carriers delay often continues one to two weeks. I don’t know about container business so much but I hear that there are huge delays everywhere. I feel that it’s only Yangtze river area where we face congestion regularly in the chemical tanker sector. This is because of fog and night navigation restriction in Yangtze river.
For the chemical tanker market, what would you say has been the biggest challenge of managing the changes brought about by Covid?
It’s crew change. Crew members are onboard for four to eight months and come back onboard after several months holiday. After Covid almost all the countries banned crew change in their country. So, crew members onboard could not get off even if they were sick or their loved ones at home were dying. On the other hand, those at home waiting to return to ships could not do so. Seafarers are without a doubt essential workers. The governments around the world did not treat them as such.
We struggled to find ways to change crew. Ports that allowed crew change requested more than 10 conditions. Almost always we could not meet one of these conditions and could not carry out crew change. Crew change costs skyrocketed as crew members had to travel longer, stay at hotel for two weeks for quarantine, etc.
It’s a big relief that such ban and restrictions have largely been relaxed in most countries recently.
Some leaders in this industry have said that the current situation is a great opportunity for Japan, with its strong maritime infrastructure, to increase its freight traffic. Do you agree with this sentiment?
Shipyards are heavily subsidized in China and Korea. In the absence of the subsidies Japanese shipyards have been losing market share. So, it doesn’t ring a bell.
Japanese ports are so inconvenient. They don't operate 24 hours a day. All the other countries operate 24 hours a day, but only Japan has such limits.
In the chemical tanker market, Korea has become a major port so all the freight indexes say how much from Singapore to the US gulf. And then for the Far East it’s always Ulsan that is used as a major port.
According to The Washington Post, we've seen Russian exports of crude oil only drop around 1/5, or 20%, in the last three months, with increased volume going towards China or India. From the perspective of your firm, what has the impact of the ongoing disruption in Ukraine been?
We don’t feel direct impact of the change in Russian crude exports. Pattern of chemical tanker trade has changed since last year before the Russian invasion. The invasion has only accelerated it. There is few cargoes coming out of Europe, so chemical tankers head toward the Far East to get cargoes. Then, the market for Europe-bound cargoes is so strong that all the ships are sucked toward Europe.
The strength of the freight rates out of the Far East is something we haven’t seen for many years. On the other hand, cargoes out of Europe and the USA are very few. The Russian invasion has accelerated it because Russian exports of basic chemicals such as methanol to Eastern Europe are now cut off. Now Eastern European countries import from faraway places like the USA, and this makes the voyages longer, less ships available, and the freight rates higher.
Prior to the Russian invasion of Ukraine, there was a lot of buzz in maritime shipping circles about the possibility of the new Arctic route that would pass by the eastern side of Russia. How feasible do you think that this route is?
I simply don't know. I worked for two years at a bulker operator and around 2010 or 2011 I had one vessel that went through the north pole twice to the Far East, so it was done a long time ago. We are not in that market now and none of our competitors are doing it.
According the energy consultancy Woods & McKenzie ocean bound shipping currently accounts for about 3% of total global carbon emissions, but this figure is expected to nearly increase fivefold by 2050 to around 17%. The need to reform is clear yet progress is slow. What do you believe to be the biggest obstacle to the adoption of alternative fuels such as LNG and even ammonia in the industry?
The biggest obstacle is the fact that the technology is not there yet, and even if the technology becomes available, the price of that equipment would be too expensive. Currently the most preferred way is to use LNG as fuel. However, a LNG fueled vessel can reduce CO2 by 26% only although the price of the vessel rises by US$10 million. Even if owner of the ship is lucky to find a charterer who is willing to pay for the higher cost, he is only able to reduce CO2 by 26%, far from zero. There are many LNG fueled vessels on the water already, and most of them are dual-fuel type, which means that you can switch from LNG to heavy fuel oil and vice versa. Ship owners have no choice but to make it dual fuel because LNG bunkering is not available at most of the ports. Sadly, in recent days these LNG dual-fuel vessels burn conventional heavy fuel oil due to high LNG price.
Ammonia and hydrogen fueled vessels will be much more expensive than the LNG fueled ones. Ammonia and hydrogen will be more expensive as fuel as well. They do not emit CO2. But, they are still at testing stage. When technology to use ammonia and hydrogen as fuel is developed and commercialized, it will be implemented on very big vessels first. Big container ships are 400 meter long. Very Large Crude Carrier (VLCC) 333 meters. These big ships have much more space to implement the new technology than small counterparts.
For example, if you want to use ammonia as fuel you need three or four times more fuel tank space, which sends freight rates higher, because if it's an ammonia fueled vessel of comparable size to a conventionally fuelled vessel, it will carry less cargo. This negative impact is relatively small for the very big ships. Chemical tankers are typically 100 meter to 150 meter long. There is not enough room to accommodate ammonia or hydrogen fueled engine and fuel tanks. Today’s technology cannot decarbonize the global chemical tanker fleet yet.
Even when such technologies are commercialized for both big and small vessels, without huge help from regulators, these kind of ships could not compete in the marketplace. We’d need some kind of market based measures like a carbon levy to penalize vessels using conventional fuel and help early movers towards greener solutions, otherwise it will never happen. Regulators know this and discuss it, but there are so many opinions and it’s so difficult to reach consensus.
When you talk about carbon neutral, it's easier if you only talk about the fuel on board a vessel, but even if it's green fuel, just to produce the green fuel you produce CO2. Carbon neutrality is assessed over an entire life cycle including emissions generated during the manufacturing of the ship and in the extraction and production of fuels. It’s not just emissions in the operation of the ship. I think it’s tough even for the International Maritime Organization because although they know about things on ships, things ashore are not their job.
The IMO (International Maritime Organization) has introduced targets to drastically reduce emissions by 2050, and you believe that perhaps the target will change soon to complete carbon neutrality. How feasible do you think these targets are? Do you think there should be a different timeline?
Unfortunately, at present it’s reasonable to assume that the majority of the global fleet will still be running on fossil fuels in 2050. It’s because by number the majority of the global fleet is small vessels. Building a ship is a 25 year investment. Before the technology becomes available, we have to invest to replace the older small vessels, and the vessels we build today will still be running in 2050 so how can we possibly be expected to make them Carbon neutral with today’s technology?
There are more than ten 50,000 deadweight ton methanol carriers which are capable of burning methanol as fuel. Methanol is another fuel expected to replace heavy fuel oil, as it can reduce CO2 by 10%. Unfortunately, the same kind of engine for smaller ships has not been developed yet.
However, if all the big vessels are replaced with zero-carbon fuel technologies, it will hugely contribute to greener shipping because they consume a lot more fuels than small vessels.
We are collecting ideas to reduce emissions as much as possible with conventional technology. We can cut down emissions, and we will try that as much as possible next time we build. However, reduction and zero are two different things.
Reading articles on zero-carbon ship projects, you may believe that shipping has the technical capability to decarbonize in several years. However, that story is limited only to big ships. Big ships such as VLCCs employed by the oil majors, iron ore carriers employed by global mining companies, and the car carriers employed by car makers could be ammonia or hydrogen fueled by 2050, so a large percentage of the fleet by volume could be zero carbon but by number the majority, including chemical tankers, are 200 meters or less. There are more small ships on the water than large ones. If you want to achieve carbon neutrality or zero emission in shipping as a whole, you must include the small ships as well.
Particulary the chemical tanker fleet is consisted of small vessels. Even the largest ones are 180 meter long only. Most of them are 150 meters or less. Chemical tankers have many cargo tanks which are either coated with specialized coatings or made from stainless steel. Stainless steel tanks are used for aggressive cargoes such as sulfuric acid, and coated tanks are used for easier cargoes. Merits of stainless steel tanks are that they can carry both aggressive and easy cargoes and can be cleaned more quickly. A 120 meter long, 12,000 ton small one can carry over 10,000 tons of many different grades of cargoes. Considering that’s equivalent to 50 large tank trucks, chemical tanker shipping is efficient.
If terminals and ports make more investments in their facilities so that we don't have to build small vessels, it will help make shipping greener. With bigger ships there's simply more room to accommodate alternative fuel engines and additional fuel tanks. We are always restricted by draft or vessel LOA (Length Overall) when entering ports, so if the shore side invest more into relaxing those constraints, shipping companies could reduce emissions further.
In Japan there used to be a preference for small lots shipped frequently, for example “every 10 days we want 500 tons of cargo to local port A”. Berth restrictions are very tight there because the draft is shallow, so only small ships can go. This was the preferred way for many, many years in Japan, but from now on if we want to make shipping greener then we need cooperation from charterers and ports. They should make shore tanks bigger and make the draft deeper so that bigger ships can berth. If they can supply green power to our vessels at berth, it will help to reduce CO2 from shipping further because our vessels will not have to burn heavy fuel oil during cargo handling operation.
For intra Southeast Asian trade we want to make our ships bigger to make transportation more efficient but because of those port restrictions it seems very difficult to move over 14,000 tons of deadweight. A 14,000 deadweight chemical tanker is about 130 meters long. If we make our ships longer than that, then there will be a certain number of regular ports that we cannot call at.
Period that the charterers get the upper hand over the ship owners have continued for many years. The charterer is like a customer hailing a taxi and naming the price. For this ship owners are responsible as they have supplied too many ships. Charterers don’t feel the need to invest in their shore facilities but now they should. Ship owners will gradually move to bigger ships in order to make it easier for them to reduce CO2 emissions.
I think things will steadily change, though. Have you heard about the Carbon Intensity Indicator? That will start from January 2023. The CII is to calculate the ratio of the total CO2 emissions to the total transport work of individual ships. If your ship receives an inferior rating of E, you will have to submit a plan to improve it and carry out the plan the next year.
But, while well-intentioned, the CII is not perfect. Some argue that the CII incentivizes longer voyages with less port time to achieve a more favorable CII rating, therefore resulting in greater absolute carbon emissions. This is because a ship burns fuel even when it is in port idling.
It is almost impossible for a single formula to evaluate different types of ships fairly. The problem is that the CII does not account for how different types of ships operate. Proposals have been made by various ship sectors in respect of correction factors, including chemical tanker sector’s proposal to exclude fuel used for cargo heating and tank cleaning. They have not been approved yet. I am concerned how our vessels’ ratings will be next year because many of our vessels engage in short voyages with a lot of port time.
There is another regulation starting from January 2023 called Existing Vessel Efficiency Index (EEXI). While the CII is operational, EEXI is technical. This will force ship owners to reduce CO2 emission from their existing ships mainly by engine power limitation.
Stainless steel cargo tank
Since chemical tankers carry various liquid cargos, tank cleaning is required frequently. You have to heat water to use for tank cleaning so chemical tankers use a lot of fuel for boiler. This will probably be a handicap for chemical tankers when it comes to calculating the CII, particularly for ships in regional trade where each voyage is short.
Small chemical tankers engage in a regional trade spend more time in port than at sea. This means that during a month a small chemical tanker is in port for more than 15 days. During the port stay she consumes fuel for cargo heating, loading and discharge operations, and crew members use such as air-conditioning. Thus, she consumes fuel in port when she is not moving. On the other hand, compared to larger ships she performs numerous voyages as each voyage is short over the period of a year, resulting in a large quantity of cargoes moved. So, the short-sea chemical tanker trade is very efficient in that sense, but it may be disadvantaged when it comes to the CII calculation.
Regulations related to NOx (nitrogen oxides) have had an impact on new fleets being built. How did you face these regulations and what changes did they cause at your company?
In the late 2010’s many ship owners scrambled to get slots at shipyards to build before NOx Tier three regulation kicked in. But, we didn’t join them. It was said that new building price would increase by US$3 million per vessel to comply with the new regulation. Then, soon after, the demand to reduce CO2 emissions started to soar.
The vessels we are going to order in future will comply with the Nox Tier Three and Energy Efficiency Design Index Phase three, which involve less NOx and CO2 emissions. Moreover, we are studying what we can additionally. Substantial cost increase is expected, so we cannot help but ask our customers to accept freight rate increase.
You have subsidiaries in Singapore and Houston, USA. South Korea is also as you’ve mentioned, a major traffic destination in the Asian region. Are there any other markets or countries that you consider interesting places to expand your international presence in terms of subsidiaries?
I think demand to and from India will continue to increase in the future. The US will be bigger too, I think, because chemical production using shale gas is gradually increasing. That’s why we have a presence in Houston. Europe is shutting down many old plants, so that region has become very imbalanced right now. Europe has to import chemicals. We don’t have any intention to open subsidiaries anywhere today, though.
You're the president of the company today and your son will be your successor. On the day you leave the company, what message will you give to your son and the future employees at the firm?
There are many definitions of a good company. To me, it's important to continue generation after generation, so I will tell him “you have to pass this company to your son”.
And to yourself [talking to his son], you'll be taking the reins from your father and when you do so, is there a particular objective or goal that you would like to achieve?
Like he said, I feel my biggest challenge is to pass this business to the next generation. To do that, I think we need to keep changing, adapting to the environment. That's my biggest focus. I keep studying the shipping market and I have learned you cannot survive without changing.
By the way, according to one study, 65% of companies in the world that are older than 200 years are Japanese. If you go to Nihonbashi, a tiny area in Tokyo, there are so many companies older than 150 years. I talked to a friend of mine who is the head of such an old company. When his company turned 150 and I congratulated him, but he said “It’s not considered very old. There are many companies older than us in Nihonbashi.”.
I’ve been doubtful about carbon neutrality by 2050 but I hope things will change. The fact is that the vessels we use today are not so different from the vessels built in 1970, so basically, ships haven't changed. Our industry
is has focused on scaling up, moving to bigger vessels in order to be competitive. Now our focus has to shift to how we can make shipping greener.
In the future we have to learn how to handle hydrogen. You have to compress it, then keep it at minus 253 degrees. That's a totally different science than we are accustomed to. To survive that kind of shift, we need people who know about cryogenics and other such things that we haven’t really been interested in before. Otherwise we cannot keep up with the trend.
Soon, all ships will be connected over the Internet, so we can have a lot of data coming in from ships. There are many possibilities for us in this field.
Now people are even talking about autonomous ships. They have reached testing stage. It’s incredible. Imagine Tokyo Bay with so many ships - big ships, small ships, passenger boats, fishing boats, pleasure boats – and there’s the current and the wind to consider. In addition the moment of inertia. It takes 15 minutes for a 300,000 ton VLCC sailing at 30 km per hour to come to a full stop, and the ship sails 3 km during the 15 minutes. I can’t imagine for ships to navigate without people onboard.
How do you think digital transformation will transform the shipping sector in the future?
It's happening. People think the industry is kind of old, but many people are already working on it. Singapore is very smart about it. Their government has already created venture funds for investing in startups.
There are many factors. When people talk about digital transformation, one of its purposes is to reduce the number of people on board. That move will be met with resistance from crew members. Technology like augmented reality is good because it helps crew members without eliminating the need for them, but autonomous ships would be crewless and this would pose many questions.
Even if autonomous ships come into reality in the future, who will supervise them? Today, every ship has crew members onboard and many of them work as supervisor from ashore later on in their carrier. Others become port pilot, port captain, ship broker and so on. Ex seafarers are everywhere in the shipping related industries. We need them, we need people who have actually worked onboard. When every ship becomes autonomous and we stop developing seafarer pool, who will support the industries in the future?
Crew members onboard do maintenance work. Ships are on the sea water, prone to get rusty. Who will do the maintenance work onboard autonomous ships? My knowledge in this field is very limited, but I think there are many things to clear before autonomous ships become reality.