We hosted a
Marine-themed investor call with our President
of Wärtsilä Marine, Roger
Holm, and CFO, Arjen Berends on May 7. The target of the call was to discuss Wärtsilä's Marine
business opportunities and offer a
chance to ask questions regarding the topic.
The recording
of the call is available here and the
presentation slides are here.
Roger started
the call by discussing marine market growth, and decarbonisation transforming
the industry in an unprecedented way. The transformation is driving Wärtsilä’s
Marine business, which is growing in sales and improving profitability.
Wärtsilä is a
technology leader in new fuels and hybrid solutions, having the industry’s most
comprehensive offering for alternative fuels. Last year, Wärtsilä increased the
R&D spending target, from an annual ~3% to an annual ~4% of net sales to
further support the decarbonisation targets. Wärtsilä wants to have a future-proof
and flexible product offering, which customers can rely on, especially given
the tightening regulation environment. The move into alternative fuels is also
driving the value proposition of service agreements, as the solutions get more technologically
advanced and complex. For Wärtsilä’s Marine business, installations under
agreement grew by 38% since 2019, and the renewal rate of the agreements has
been around 90%.
Decarbonisation
is transforming the Marine industry and driving Wärtsilä’s growth
The marine
industry is moving from a single-fuel environment to a multi-fuel environment.
Methanol and ammonia are seen as the likely alternative fuels to be used, as they require less space on the vessel
than other green alternatives. We, in Wärtsilä, see a clear uptake of methanol already,
and estimate that ammonia will follow. Around half of the overall order book
today, looking at a gross tonnage of ships, is already going for alternative
fuels, including LNG. For example, 60% of containerships contracted in
2023-2024 will be capable to run on methanol.
Wärtsilä’s focus is on the high-value, performance-driven
segments, such as cruise, ferry, and offshore. Wärtsilä’s market share on 4-stroke medium-speed engines
in megawatts for cruise is ~85%, for ferries ~65%, and for offshore ~55%. The
global cruise capacity is forecasted to grow by over 10% from 2024 to 2028.
Cruise travel has reached 107% growth of 2019 levels, indicating a better
development than general tourism.
In Wärtsilä’s equipment business, decarbonisation is strengthening the market position as we
want to lead in both fuel flexibility and efficiency. The market growth is supported by Wärtsilä’s
comprehensive offering of alternative fuel engines and extensive experience in
the industry. For example, Wärtsilä’s
market share in 4-stroke
medium speed main engines running on alternative fuels is ~75%, compared to ~45%
on all fuels. The equipment order intake has been developing positively, with
alternative fuel-capable engines for Wärtsilä accounting for more than 60% of
the megawatts ordered in 2023. The interest of methanol has grown faster than
expected, and ammonia is also gaining interest.
Wärtsilä’s
strategy of moving up the service value ladder, solid installed base, and decarbonisation-driven
retrofits are driving the growth in the service business. Tightening
regulations and rising fuel and emission costs are increasing the demand for retrofits. An estimated 53% of the fleet will not be CII
compliant (Carbon Intensity Indicator) in 2024, which may increase the demand of
various retrofit solutions. Total investments in retrofits are estimated to be
EUR 15-20 billion over the next decade. Examples of retrofit solutions include
propulsion efficiency upgrades, alternative fuel conversions, radical power
derating, and electrification projects. The key challenge
is to balance the speed of decarbonization with financial feasibility.
Tightening regulations and increasing fuel and
emission cost will boost demand for retrofits and alternative fuel-capable
engines
IMO
(International Maritime Organisation) upgraded the regulation targets in July 2023
to net-zero emission reduction targets for 2050. This accelerates
the speed of the decarbonisation journey on a global scale because, in
shipping, vessel lifetime is long. The ships ordered today, will
be still operating in 2050. In the EU, the regulations are accelerating the
growing costs of using fossil fuels within EU waters. The fuel costs may double
due to emission fees up to 2030, compared to 2023. The EU has implemented measures to ensure that if
one is not paying for the ETS (Emissions Trading System) allowances and not
meeting the targets, there will be both
financial and operational penalties. This will be monitored by the member states. Those not following the regulations will be
publicly listed, and if non-compliance continues for too long, they will be banned from
entering EU ports. It is expected that during 2025, also the International
Maritime Organization (IMO) will clarify more rules about the financial
implications.
Onboard CCS
can unlock EUR ~10bn business in the next 10 years
Carbon Capture
and Storage (CCS) is seen as a significant market opportunity in the coming
decade, helping to drive the decarbonisation journey.
CCS will allow to capture over 70% of the CO2 generated by carbon-based fuels.
Good development has been seen in Norway, where the first full-scale
installations will be done in Q4 2024. The targeted commercial market release will
be in 2025.
Q&A
According to your presentation, more than half
of the ships are currently non-compliant with the CII regulation. What
will non-compliant ships do in practice?
Many non-compliant ships are already doing slow steaming to
improve efficiency and compliance. This involves operating at slower speeds to
reduce fuel consumption and emissions. Ships that fall into the two lowest
categories (D and E) under the CII regulation need to create an
action plan to improve their carbon intensity. This could involve
propulsion efficiency upgrades or fuel retrofits, although the latter is seen
as a last resort and is not yet widely implemented. Different efficiency
upgrades can be done on a vessel to extend its compliant years. The
process of improving compliance and efficiency is seen as a
development journey that will accelerate over the coming decade.
Regarding
the merchant segment, which vessel types does Wärtsilä have a strong market position in, in terms of both main
engine and auxiliary engines?
The LNG carriers are
sold with 2-stroke main engines
and 4-stroke auxiliary engines. We provide dual fuel engines as auxiliary
engines to LNG carriers. We are also targeting to change this segment towards
hybrid electric where we would have 4-stroke main engines. For
smaller merchants like chemical tankers, we can offer 4-stroke main engines,
but the big volumes come from auxiliary engines.
Overall Clarkson’s ship contracting statistics
seems to have little bearing on Wärtsilä’s demand scenario. What is the reason
for that?
Although we also provide 4-stroke auxiliary engines, our sweet
spot is in vessel segments with 4-stroke main engines. Clarkson’s statistics include
all vessel contracting, and for that reason Wärtsilä’s orders might not always
correlate with that. For example, in 2021, vessel contracting grew
significantly, but the growth was driven by bulk carriers, which isn’t that
significant of a segment for Wärtsilä from an engine point of view.
Regarding
the enforcement of regulations, how much those might affect customers’ investments
into either new engines or
retrofits?
The regulations in the EU are driving customers decisions. The EU regulations are not only driving the EU-owned vessels but everyone
operating in the EU ports and waters. We
have talked to Chinese customers, for example, where they state clearly that
the reason why they want to make
development to their vessels now
is related to the EU regulations because they will operate in EU waters. We
expect to see more clear rules on the IMO regulations and actions from
2025 onwards.
How do
you see the competitive environment developing in the CCS market?
We expect to be among the earlier entry points into this
market with our technology and
capability. However, there will be a development of different
competitors over time, but we are
well on time with our development for
the market.
How will the regulations treat carbon capture
as a solution? Is there any concern that it would slow the uptake of new fuels,
or is it just mainly a retrofit solution that would solve a
situation where new fuels wouldn't be applicable?
For the green fuels’ development and IMO regulations, there
are still decisions to be made regarding the applicability and treatment of
carbon capture solutions. However, we don’t expect challenges regarding that. From the vessels' point
of view, the solution is applicable for both 2-stroke and 4-stroke engines, but
the biggest opportunity will be for 2-stroke vessels,
especially on the retrofit side.
You mentioned that decarbonisation is
strengthening Wärtsilä’s position and market share in the equipment
business. Is that because of the technical capabilities of alternative fuel engines
or aftermarket capabilities?
The key element when choosing the engine provider is
the technical capabilities of fuel flexibility, which is our strength. Customers are
considering the long-term implications of their choice. They might initially
choose a dual-fuel diesel-LNG engine, but they also consider the
potential need to upgrade to a different fuel during
the vessel’s lifetime. They want to ensure that their chosen
supplier will still be around in ten years, capable of supporting upgrades
to fuels that may not even exist today. The wrong choice could negatively
impact the value of their vessel. The extensive global service network is
another key factor in decision-making. This network is
valuable regardless of the fuel chosen, but it becomes even more important when
dealing with more complex technical solutions. The fact that Wärtsilä has a
presence in all necessary locations is a significant advantage when selecting a
new engine.
You
stated that the installations under agreement grew by 38% since 2019. How common it
is to get the engines under
contract, and where do you see that to develop in the coming years in terms of retention
of the installed base on the service agreements?
The interest in agreements increases the more complex
vessels or technical solutions you go for. Going towards new green fuels will most likely even further increase
the interest in doing an agreement because
the customer itself will
not have the knowledge to deal with all parts. We
have a lot of knowledge ahead of the customers based on our testing, our developments, and the training of the crew. So, we firmly believe that
agreement interest will continue to develop in a positive direction in this
transformation.
When will you have the full product
portfolio available for methanol and ammonia engines?
For methanol, a
broad portfolio has already been
launched. As for ammonia, the process
is still in the early stages. The Wärtsilä 25 is the only model that has been launched so
far. More engines running on ammonia are
planned. The first model is always the most challenging
because once the technology is proven to work, productising the rest is a smaller step. The
current focus with ammonia is to demonstrate that the technology is efficient
and works well with the combustion engine. More products will be released based
on market demand. While a timeline for when a larger portfolio
for ammonia will be available has not been
published yet, it will
be determined based on market needs.
What kind of changes do you need in case you
start running the engines with biofuels or hydrogen?
Wärtsilä diesel and Dual Fuel (DF) engines can operate on biofuels without any modifications, provided that the biofuels meet specific pre-defined fuel characteristics. For ship operators or owners planning to use biofuels in their vessels, we provide biofuel specifications. Wärtsilä has successfully operated a commercially used power plant gas engine on a 25 vol % hydrogen blend without any engine modifications. However, using higher levels of hydrogen typically necessitates some changes.
