Ships now have an extra two years to fit ballast water treatment systems. The expected consolidation amongst technology providers, already fueled by high rewards and fearsome market barriers, is likely to intensify.

Introduction

All ocean-going ships use water pumped within their hulls as ballast – this is vital to ship safety and stability. However, when the water is discharged this can mean invasive non-indigenous organisms are transferred from one aquatic ecosystem to another. A particularly devastating example was the arrival of the zebra mussel (Dreissena polymorpha), in the Great Lakes of the United States and Canada. Within 10 years of its first sighting in 1988 it had spread to all five of the Great Lakes. According to the US Department of State, the United States power industry alone now spends up to US$60 million per year in removing zebra mussels from pipes. The total economic cost of this introduction has been estimated by the U.S. Fish and Wildlife Service at about $5 billion.

Figure 1: A heeled ship – Courtesy of United States Coast Guard

The International Maritime Organization (IMO)’s Ballast Water Management Convention is a global treaty which has been ratified and, until a two-year delay was agreed last month, was due to come into legal force on 8 September 2017. The effect of the new regulation is expected to be dramatic. During the peak installation years

(now expected to be 2019 to 2026), the ballast water equipment market is estimated to be US$18B to US$28B, with approximately 30,000 to 40,000 ballast water management systems (BWMS) sold during the implementation period. This is a wide range and depends on the number of ships decommissioned and the number of ships that may be used regionally, so will not venture outside of their own ecosystems and won’t require BWMS on board. The timeline for implementation affects this to some degree. The longer implementation takes, the greater the number of ships that will be decommissioned.

In any case, the market will subside to a much smaller baseline once all affected existing ships have been retrofitted or scrapped. There are 1,500 to 2,500 new ships built each year.

The future of the technology market

The ballast water treatment sector is dominated by UV systems, which make up 50% of the market. Next is electrolytic systems at approximately 35% of the market. Both of these are combined with filtration to reduce fouling and/or increase transmission of light. Chemical injection systems hold approximately 10% of the market. The remaining 5% is comprised of a variety of other treatment technologies.

The situation for UV providers is complicated by the fact that the United States Coast Guard (USCG) is separately implementing regulations that are even stricter than those of the IMO. The USCG requires that ballast water have no living organisms after treatment – the IMO merely requires they not be able to replicate. The USCG requirement will cause UV systems to need much higher power, take up additional space, use additional UV lamps and therefore cost more. If the USCG continues this approach, we are likely to see the use of UV-LED technologies increase to fill part or all of the decreased market share of conventional UV systems.

Electrolytic systems are generally used in larger ships. Assuming that the shipbuilding market continues to build the same ratio of large versus small and medium ships, these systems will continue to hold approximately 35% market share.

Figure 2: BWMS current market share

 

The water sector opportunity

The opportunity for companies in the water sector are categorized in five segments; equipment, engineering, installation & repair services, servicing equipment and testing laboratories.

Equipment: There are over 60 equipment companies competing in this field.

Engineering: Engineering firms are often located near the drydocks where the installation of BWMS takes place. A few examples of companies that specialize in this part of the market are:

A high-profit area of the industry is the engineering design of systems. Each ship is different. Therefore, the retrofitted BWMS must be engineered for each application. Engineering can be done in any locale. However, there are often modifications during installation of the treatment system. Local offices near dry docks will be beneficial to handle these changes.

Installation and repair services: Often, service providers are divisions of engineering firms or ship management companies. A few examples of companies in various parts of the world that specialize in services are:

Servicing the equipment: This is another opportunity for companies with water treatment equipment expertise, especially those with technical staff working with systems in operation. Ship owners want the assurance of service for a 20-year time period. Included in this part of the business may be the resupply of parts and materials. This opportunity will be greatest in areas near dry docks. The regions that will dominate in service operation are China, the Middle East and South Korea. Approximately 70% of dry dock work is performed in China. However, Korea would like to increase their market share as they have lost business to China. They are exploring other areas of the shipping building and servicing business to meet this goal.

Laboratories: There are few laboratories not associated with governments or universities. Examples of laboratories that test for invasive species are:

An area that is a bottleneck for the approval process is the availability of testing facilities and laboratory services. This encompasses testing entities, such as Great Ships Initiative, Cal Maritime’s Golden Bear facility, Maritime Environmental Resource Center (MERC) and others in Europe and Asia, and laboratories with water-borne biological testing capabilities. The EPA’s Vessel General Permit states that annual analytical monitoring is required. In many instances, it has been difficult to have samples collected and tested.

Barriers to entry

The barriers to entry are very high. There are dozens of competitors in the market and the cost of obtaining certifications is US$3 to US$5 million. The process of gaining type approval takes several years to achieve. There is little opportunity for small companies and innovative technologies to enter the market.

The USCG and IMO have different requirements. This adds complexity for the equipment suppliers and the shipping companies. In addition to the cost of approvals are the costs of researching and developing the equipment prior to the beginning the process of obtaining approvals, global sales and marketing efforts, personnel salaries and operating expenses.

Regulatory uncertainty is another barrier. The IMO convention was ratified on 8 September 2016. However, the validation standards are still in flux. Industry experts believe delays, in addition to the delay that was granted in mid-2017, may continue while these standards are solidified and test protocols are clearly aligned with the standards. These weaknesses in implementation are currently being addressed.

The implementation delay is not seen as good news for suppliers of goods and services in this industry. It will further delay an already long period of time to revenue generation, causing financial stress on smaller and/or companies focused primarily on this industry. Generally, owners and operators in the shipping industry are pleased with the extension. The benefits cited are that the suppliers can prepare to meet demand, Class Societies and consultants can better meet the various needs of their clients and additional equipment can be approved. These effects will be lessened as the USCG’s compliance schedule is not being changed.

Likelihood of consolidation 

Due to the long delays in ratification and implementation, many small and medium treatment system providers have struggled to survive. Therefore, the likelihood of consolidation is high, especially as the horizon for success is nearing. For investors and companies interested in acquiring ballast water technologies, this is an opportune time to shop for a company with solid technology and certifications.

This consolidation will also include partnership and other types of business arrangements. Some larger companies will purchase technologies that allow them to offer systems to both large and small ships.

Another reason why consolidation can be expected is that ship builders want to have standard vessel designs, in as much as this is possible – the IMO has approximately 75 systems type-approved. In order to minimize the types of systems and engineering modifications, maximize the interchangeability of crew and decrease the spare parts inventory needed, ship owners will have a short list of approved systems. The market isn’t large enough for this many solutions so some systems and/or companies will exit the market.

Verdict

For small-to-medium ships such as container ships and cruise ships, BWMS are typically priced in the range of US$200,000 to US$500,000. Systems for large ships, such as cargo ships and tankers, are priced in the range of US$1,000,000 to US$2,000,000, although some systems can be significantly more expensive.

Most industry experts appear to believe the price will go up. The consensus is that prices appear to be artificially low due to hyper-competition. Extensions for compliance are being granted which will push projects into a smaller window, the latter part of the implementation period. This will cause some companies further financial stress and they may exit the market, be acquired or go bankrupt. Fewer BWMS competitors will exist. Near term, prices may incrementally drop. After consolidation, it is likely that prices will go up.

The opportunities are with small-to-medium sized independent equipment suppliers and technical companies with depth of expertise in ballast water management systems. Many laboratories are associated with governments or universities and are not able to be acquired.

The time to enter this market is now. For companies able to make judicious investment decisions and withstand another couple of years of regulatory uncertainty, the opportunities are significant.

Judith Herschell Cole is a BlueTech Research TAG Expert and President of Herschell Environmental LLC. See Article at BlueTech Research.