Sustainable and profitable often sound like an unrealistic match in today’s terms, with the strict definition of the term “sustainability” implying very capital-intensive dual-fuel asset investments, the returns of which in most cases do not make financial sense for most shipowners.

The $1bn question

This article is part of a series written by people across shipping in response to this question about how to deploy a hypothetical TradeWinds Sustainable Shipping Fund:

How, where and why would you invest $1bn for the best return in sustainable shipping, as the industry grapples with the need to cut carbon emissions, improve efficiency and keep cargoes moving in a world facing multiple economic and political challenges? The investment will be made now and ideally held for the next seven years to the end of the decade. As an added bonus, give one policy or regulation you would like to implement from 1 January 2023 to benefit shipping?

A $200m dual-fuel container vessel for example, or a $150m dual-fuel VLCC, seem unattractive investments given a high-inflation environment, a well-supplied container fleet and a blurred horizon for tanker demand beyond 2026.

The returns offered by other instruments such as green — sustainability-linked — bonds are also far from attractive at the time being, while if you were to approach sustainability in an all-encompassing way, sectors such as bulkers that facilitate the trade of high-polluting commodities, such as coal, should also be excluded.

On the other hand, the seven-year investment profile, and the necessity for cargoes to keep moving, means that the non-dual-fuel fleet should not be ignored investment-wise, if a business is to remain competitive against operators of vessels being already in service, which, like it or not, remain very essential to world trade (and humanity) as the transition to net-zero takes place.

So, do not expect, for example, to see many dual-fuel ultramaxes anytime soon, certainly not in the next seven years.

Yet someone needs to do the job, right?

With that in mind, and in the spirit of some diversification across the portfolio, the following assets would be chosen, excluding any newbuilding investments, as the end-2025 or 2026 available slots today, combined with the seven-year horizon, would seriously impact the profitability of the entire portfolio.

The dual-fuel asset part of the investment would mainly focus on the LPG sector. LPG itself is cleaner compared to other fuels, hence cargo being carried gets a check for sustainability.

When looking at the cost of an MGC or VLGC resale with dual-fuel engine, this makes more sense compared with similar ones in other sectors given the cost/return relationship, and the rate of depreciation for LPGs has historically been remarkably low compared to other sectors, even when other segments are doing exceptionally well, with medium to large LPGs retaining an impressively high resale value.

About $700m would be spread across four dual-fuel VLGCs aged from two years up to resale at about $95m each on average, and five MGCs of the same age, at the low to mid-$60m range.

Another $180m would be spent on four very modern or resale dual-fuel/dual-fuel-ready MRs, and the remaining $120m would be invested in the same number of four to five-year-old modern ultramaxes — bulkers being the sector where you can buy young assets at lower prices today — on which the best possible upgrades would be done to improve efficiency.

The policy I would want to see implemented is an official cap on speed, after further improvements to the Carbon Intensity Indicator have taken place, which would offer an intermediate solution for sustainability and would obviously help with shipping profitability.

Read more