Capesize iron ore freight rates equilibrium and time charter equivalent earnings given Decarbonization targets

The objective of this research is to assess the interaction of maritime decarbonization policy with Capesize iron ore freight rates and optimal speeds in order for shipowners to maximize Time Charter Equivalent (TCE) earnings in the spot market. Error Correction Models (ECMs) are developed for estimating the equilibrium relationship of freight rates with bunker prices and a proxy for China’s steel margins, for two major trade routes, namely Australia-China and Brazil-China. Freight rates are forecast in scenario analysis and optimal speeds are modeled before and after the International Maritime Organization’s (IMO) Greenhouse Gas Fuel Intensity (GFI) targets and the accompanying Greenhouse Gas (GHG) pricing mechanism are assumed to be implemented. It is found that when the GHG pricing is internalized into bunker prices in 2030, the rise in freight rates may be able to absorb the GFI compliance costs at varying rates across the speed-fuel consumption curves of different conventional Capesize engine specifications. As a result, the incentive to adjust optimal speeds downwards is mitigated, particularly for eco Capesize without scrubber. Instead, when shipowners fully absorb the GFI compliance costs (i.e. GFI costs are treated as external to bunker prices), downward adjustment of optimal speeds may be incentivized more. In addition, the speed that optimizes the Carbon Intensity Indicator (CII) rating is calculated and compared with the optimal speed, in order to establish the trade-off with optimal earnings. Optimizing the CII rating using speed only is found to require a higher deviation from optimal speeds in 2030 compared to 2026.