MISC Annual Report 2019

59 58 OUR VALUE CREATION STORY MISC BERHAD PEOPLE. PASSION. POSSIBILITIES ANNUAL REPORT 2019 Our Operating Environment The US sanctions on Iran, Venezuela and some Chinese-owned tankers coupled with a slew of geopolitical events in Saudi Arabia and Iran had driven the cost of moving oil around the world to hit an 11-year high in the fourth quarter of 2019 as producers scrambled to secure available tankers. The IMO 2020 sulphur cap regulation came into force on 1 January 2020, whereby the sulphur content in fuel oil must be reduced to 0.5% from 3.5% for all vessels worldwide. The shipping industry is also under increasing pressure to reduce its carbon footprint. The IMO has introduced targets towards gradually decreasing greenhouse gas emissions by at least half compared to 2008 levels by 2050. Sources: Forbes, Norton Rose, Gibson Crude oil tanker earnings have fallen from the highs at the end of fourth quarter 2019 as positive drivers have faded, including seasonal factors and sanctions being lifted on the Chinese-owned tankers. Nevertheless, the possibility of further sanctions remains. Towards the end of 2019 the transition to the use of low sulphur fuels in complying with IMO 2020 was handled with little disruption to global trade. A modern ship is a highly capital-intensive asset with a typical life span of around 25 years. To deliver on ambitious climate targets, zero-carbon emission vessels will need to enter the fleet by 2030. In the meantime, LNG, which complies with IMO 2020 and has lower carbon emissions compared to fuel oil and marine gasoil, is seen as the preferred transitional marine fuel. MISC’s Petroleum & Product Shipping segment has maintained a mix of long-term contracts with some spot exposure which provides the agility to ride on the volatility of charter rates. MISC’s vessels are in compliance with IMO 2020 requirements. MISC has embarked on a joint development project to develop a zero-carbon emission vessel. Petroleum & Product Shipping segment already operates LNG dual-fuel tankers, and is committed to growing its fleet of LNG-powered vessels. The LNG Asset Solutions segment has secured a charter to provide an LNG bunker vessel. The fledgling LNG bunkering segment holds growth potential. 2019 LANDSCAPE Trade sanctions and geopolitical instability Increasing environmental awareness globally OUTLOOK IMPLICATIONS TO MISC Source: Clarkson Crude Oil Tanker Average Daily Earnings January - December 2019 As a result of the sanctions, approximately 16% of the global fleet was taken off the market. Sources: Petronas, S&P Global Platts, Hellenic Shipping News, IHS Markit $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 4/1/19 4/4/19 4/7/19 4/10/19 Average VLCC c. 2010-built Earnings Average Suezmax c. 2010-built Earnings Average Aframax c. 2010-built Earnings US$/day 3/1/20